If you’ve followed our feed recently you may have seen Air Accounting placing in both the AFR Fastest 100 growing businesses in Australia; and the Financial Times fastest 500 growing companies in the Asia Pacific.
I’ll forgive you if you rolled your eyes when reading this. 🙄
Placing on fast growth lists is almost always based on one or both of the following metrics:
- revenue growth in $; or
- employee growth by headcount
Sadly, these are often mere vanity metrics.
Why? Well, in most industries revenue and headcount are not the determinants of enterprise value, they are simply indicators of top-line growth.
Consequently, tracking these metrics alone subconsciously encourages business owners to “believe their own hype”, even when the underlying business model is flawed.
Let me explain with a simple example…
There’s a difference between growth and scaling.
If you really want to place on a fast growth list, create a business selling $100 notes for $90 each.
I guarantee you’ll achieve revenue hypergrowth with demand so strong you won’t be able to supply the notes fast enough.
Whilst the above example is obviously ‘tongue in cheek’, what’s not always obvious is that: if your unit economics are backwards, the faster your revenue grows, the faster you will go broke.
Unit Economics (or UE) and Scaling
Predicting whether your business can scale requires an intimate understanding of unit economics.
In it’s simplest form, UE is the expected revenue of a single unit being sold minus the avoidable costs the company incurs from offering it.
For example, If you’re a retailer this might be as easy as you buy product for X and sell it for Y.
The problem is, it’s rarely this simple and requires a deep analysis of fixed, variable & avoidable costs and their relationship to revenue, pricing & product mix.
Whilst that sounds incredibly boring, understanding when revenue will continue to rise without a similar increase in resources is not – this is no longer simply growth, you’re now scaling.
Capturing the value you create
If you’ve ever been congratulated on your business growth but wondered why there is no cash in the bank, a deeper dive into UE might be the answer.
Because, if your business is creating value for your customers, your business model should capture part of that financially.
The first step is having someone on your team responsible for defining and measuring your UE.
For instance, at air accounting I spend 3 hours a month on our UE analysis.
If you don’t have anyone on your team looking after UE, reach out to your accountant, or consider our airCFO service.
I’ll be digging further into unit economics and strategic loss making in my next post…