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Edition 487 – Flatlining

Written by Dean Robinson.

I was looking at the financials of a large corporate, recently. As you do!

It’s a company that has a relationship, of sorts, with a client of mine. It’s unlisted, so you only get to see the headline financials, not the full guts of everything. I can hear the groans from here, but stick with me.

Their revenues for the past 3 years are as follows:

  • 2024 – $512m
  • 2023 – $506m
  • 2022 – $505m

See how, over three years, revenues have flatlined?

When it comes to profit, or in this case, EBITDA (which is Earnings Before Interest Tax Depreciation & Amortisation) it’s a similar story:

  • 2024 – $128m
  • 2023 – $122m
  • 2022 – $122m

Other than the fact that the 2024 increase in revenue flowed straight through to profit, it’s a story that has a hidden message.

When revenues flatline, that’s the first warning sign? When profits flatline, that’s the second warning sign? There’s a crunch coming – as without growth, at least at the rate of inflation, the business is going backwards.

Beware the revenue death zone. In my almost four decades of working with small and family businesses, I’ve seen this happen too often. It’s the sign of a business that is losing its way, or has already lost it. In my observations, it’s a by-product of one, or a number of factors, including:

  1. The business doesn’t know how it makes money, and where in its product portfolio it makes money.
  2. The business hasn’t analysed whether the market is changing, and therefore, whether their product is changing at the same pace.
  3. The business is operating in the wrong markets, geographically.
  4. The business hasn’t engaged in long term strategic planning, to map out where it wants to go, and why it wants to head in that direction.
  5. The owners have become bored with the business, and are distracted by one, or a myriad of other issues (though granted, this is unlikely to pop it’s head up in a large corporate scenario, you would think).

What’s the risk? Every time I’ve seen this happen inside a business, it’s a pre-cursor to a crash. Revenues can drop between 10% and 25% over a three year period, simply because the flatlining of revenues and profits is masking what’s truly happening, which is that customers are purchasing out of habit, and are already toying with a competive offer, elsewhere, for their next purchase.

When revenues drop 10%, that’s enough for some businesses to go from profit to break-even. Or loss, depending on the margin at which they’re operating.

When revenues drop 25%, that’s nothing short of a disaster. That often leads to large losses, quickly, that are hard to stem. Cash evaporates and, before too long, the owners are looking to borrow money, to plug the holes that are opening up.

Take a look at your own numbers over a three to five year period. What’s the story it’s telling about your business? Are you growing, if only modestly? Or are you flatlining? If it’s the latter, now is the time to start digging deeper into what’s going on?

This Week’s Tip

“You can push through the Revenue Death Zone if you recruit, renew and refocus
– and have the resources to do it.”