Do you run a business for revenue or for profit?

Talk to your everyday, run-of-the-mill economist (the sort you often run into at the gas station) and you’ll hear about economies of scale.

Distilled to a basic level: increasing production lowers cost. The bigger, the more efficient.

It makes sense in a lot of ways. If you were to manufacture and sell a single box of Poots, you’d spend thousands on manufacturing that single box, and at the end of the day you can still only be able to sell it for $4. The research, raw materials, packaging, and distribution are cost prohibitive for low-volume production. Make a million boxes of Poots, though, and you’ll be able to manufacture and sell each one at a profit.

But this is not a universal law you can apply to just anything, although people try.

Folks running small businesses often think if they can just get bigger (more sales, more contracts, more revenue) they can get richer.

But bigger does not always mean taking home more money home at the end of the day.

At some point, there are diminishing returns.

And at some even further point, those returns turn around and go south. There is a sweet spot...the very middle of the bell curve...where scale and profit are maximized.

That is why the owner of a tiny company with four or five employees could be making far more at the end of the year than the CEO of a company with 100 employees.

Employees, offices, conferences, benefits, and especially those pesky account executives aren’t free. 

Of course at some point you can just force-grow through the inefficient stage and reach enterprise level, where you are once again rich...but that’s really hard. That’s like going from 50 employees to 5,000 employees. Few of us can or wantto do that.

More revenue does not equal more profit.

Profit is the delta between revenue and expenses.

When you’re a small business, keeping things tidy and keeping the overhead low is not just being frugal, it’s literally increasing your paycheck.

I wonder, sometimes, at high-revenue, high-expense small businesses who spend so lavishly. 

$50,000 here on a business vehicle, $75,000 there for office furniture, $150,000 here to renovate a space, $25,000 there for everyone to attend a conference, and pretty soon the owner is left with a paycheck that’s $300,000 less than he could have had. All in the name of growth.

Or folks who move from Nebraska to NYC for a significant pay bump, only to realize that to maintain their current quality of life, they'd need to be making waymore.

Or people that pick a market/career just because it's big/popular (I have an entire opinion on markets that are ripe for disruption...niche things you've never heard of...but that's a topic for another week).

Sure, maybe being a physician's assistant is a solid, higher-than-average job...but it'll never give you outsized gains. The outsized gains are achieved by the guy who went into antique bronze statue restoration.