The easy answer to the question we posed this month to our editorial advisory board is “both.” But software companies are often put between a rock and a hard place: Board members and/or potential investors want to see revenues spike, while leadership teams often feel the pressure to run lean and increase profits.
Q | Should software companies be more concerned with top-line or bottom-line growth?
A | A DEFINITE ANSWER to whether top-line or bottom-line growth is more important will absolutely vary on the company stage. However, there’s one important metric that shouldn’t vary. It’s a fantastic way to measure your success throughout all stages of business: the relationship between top-line and bottom-line. A lot of emphasis is put toward how well you are growing or how well you are converting revenue to profit. However, those discussions often leave out the importance of quantifying the two against each other.
In the software world, this relationship is often measured by “The Rule of 40.” The rule’s equation is (annual revenue growth %) + (your operating margin %) should equal 40 percent. So, if growth is 30 percent, profits are 10 percent. If growth is 40 percent, profits are 0 percent. If growth is 80 percent, profits are -40 percent. Losing money is OK if your growth is high enough, but if growth is slow, then you should increase your bottom line. The two must work together. Of course you can always do better than 40, and that’s great to a point. If you are greatly above 40, then you’re probably not spending enough. If you are greatly below, then you’re spending too much and/or not growing enough.
JOEL RAGAR is the cofounder and CEO of foreUP, a SaaS software for golf course operations. Founded in 2011 and headquartered in Lindon, UT, the company is debt-free and has 40+ employees.
A | AS A FOUNDER OF A BOOTSTRAPPED SOFTWARE COMPANY, I am a big proponent of watching the bottom line. While it’s fun to spend money growing a business without worrying about profitability, the software industry is littered with the carcasses of businesses that never achieved profitability despite growing top-line revenue at a nice clip. I believe that profitability does a better job than top-line revenue growth at supporting a claim that a business model is sustainable. As I always say to my team, I would rather go out of business making money than go out of business losing money.
KEVIN KOGLER is the founder and president of MicroBiz, a cloud-based POS and inventory management software with more than 25,000 small and midsized retail partners worldwide.
A | IT IS OFTEN SAID THAT IN BUSINESS, “if you’re not growing, you’re dying.” That’s a strong statement, and arguably true. However, most people believe that growth equals profitability – which could not be further from the truth. One of my favorite Mark Cuban quotes is, “The idea that growth equals profitability is a misconception. If you can’t aff ord the financial or qualitative side of growth, it can just as easily put you out of business.” Regardless of what business you’re in, you have to figure out the profit equation first. Many companies, particularly in the software space, grow very quickly by “buying” market share, meaning that they give up profitability while they establish a quick presence and grow very rapidly. This is a valid growth strategy, so long as they have figured out how to make money in the long run, before they run out of capital to get there. Too often, companies develop a “grow, grow, grow and we’ll figure out the profit equation later” strategy. Unless you have an unlimited supply of capital, this is not a valid operating model. Always start by solving the profit equation, and the best possible solution is to grow both top and bottom lines simultaneously.
TOM BRONSON is the founder and president of Mastery Partners. He is also the former president & CEO of Granbury Solutions, which he helped grow from 20 employees in 2010 to over 200 employees with more than 10,000 customers.