Revenue Quality – Overlook This at Your Peril Part II – Or How Not to Get Fu%ked

Last wrote about the five aspects of revenue analysis that one must be cognizant of.  A little bit more in depth now we shall go.  For number (1) revenue that’s concentrated in only a few clients – this should seem obvious – if a couple of clients make up a large majority of the revenue – it’s a very bad sign.  Not only because any loss of client would devastate the business but because its indicative of how tough it is to grow revenue.  Regarding (2) revenue that has increased as a result of price increases not volume increases – I happen to have first hand experience with this (unfortunately) – and it occurs typically in commodity based businesses.  In may case the price of plastic resin was increasing which led to higher year over year revenue – however the volume of plastic resin sold was NOT.  Clearly, a danger sign because once again its indicative of a company that finds it tough to attract customers beyond its base and secondly – what happens when the plastic price drops and one has purchased the business with different expectations of revenue and profits?  Regarding (3) revenue that is a result of one time revenue generating opportunities – thats simply seeing where revenue may have occurred due to one time generating opportunities that won’t recur.  Regarding  (4) revenue that may have been booked but at lower margins – revenue at any price to inflate revenue growth reduces the overall quality of the business.   And finally (5) revenue that has been reoccurring but may not in the future – in which the seller knows something that you don’t.  In this case is the business changing – has a client indicated that they may not require their services.  Next Post – Tales from the Crypt – deathly tales of failed revenue streams.

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