David Cummings on Startups

How a Software Biz and Ecommerce Biz with $5M More Revenue are Financially Similar

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David Cummings

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Revenue stamp (1pi) for financing the construc...
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At last week’s EO Accelerator education day on finance, the CPA put up a slide showing how a $3.5 million/year revenue consulting business could be exactly the same financially as a $20 million/year construction company (imagine the construction company flows through most of its revenues to sub-contractors). From a technology startup point of view, a similar story can be painted for a $10M revenue ecommerce business and a $5M revenue software company. It comes down to the cost of goods sold and the gross margins of the business.

Here’s how a $5M revenue software company and a $10M revenue ecommerce company might look similar financially:

  • Ecommerce business – $10M revenue, $5M spent on inventory, $1M spent on outsourced warehouse and shipping, $4M left (margin)
  • Software business – $5M revenue, $1M spent on customer acquisition (cost of goods sold), $4M left (margin)

Entrepreneurs enjoy talking about the number of employees they have as it’s a decent proxy for company size. Employee count and revenue are two very different things. The next time someone volunteers revenue size, consider their gross margins in making a comparison to other types of businesses.

What else? Do you consider gross margins when thinking about the size of a company?

Comments

7 responses to “How a Software Biz and Ecommerce Biz with $5M More Revenue are Financially Similar”

  1. Dave Avatar
    Dave

    Diversity of revenue and geographic reach. I hate it when people ask how many employees we have as I think that is such a poor measure. This is a stat that I just don’t pay attention to whereas I focus more on the quality of the employees and not the number. A much better measure is gross and net revenue per employee when evaluating competing companies.

    Reply
    1. Mike Schinkel Avatar
      Mike Schinkel

      Agree! Clearly, you’ve done a great job on the quality metric.

      Reply
  2. pfreet Avatar
    pfreet

    How big is your company? We have xx employees.

    That needs to be killed dead. What a terrible way to gauge the size of a company.

    How big is your company? We threw off $yy dollars last year.

    Much better 🙂

    Reply
    1. Mike Schinkel Avatar
      Mike Schinkel

      Agreed! Employee count as a measure is a horrible way to gauge the success of a company. We should get ego points for how few employees we need vs. how many we allow ourselves to hire. I learned that the hard way.

      Reply
  3. Mike Schinkel Avatar
    Mike Schinkel

    I used to run a ~$12 million/year catalog mail-order company. I was always aware of this comparison and felt that we compared to a ~$4 million per years software company.

    Reply
  4. David Felfoldi Avatar
    David Felfoldi

    Excellent point, and one I think we’ve discussed before.

    Too often I’m asked in a meeting how many employees we have. Instead, we should be asked what is our income and margin per employee. Look at fantastic products like Basecamphq — they had a team of 5 for years, but revenue that would make any business man envious.

    As with many things, it’s not the size that counts.

    Reply
  5. Exceptional web dev East Sussex Avatar
    Exceptional web dev East Sussex

    Well done for yet another first-class article.

    Reply

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