Most owners have a number in their head for the size of the business.
It is the number they say at industry events. It is the number they tell a banker. It is the number that has, over time, come to define the business in their own mind. We are an eight million dollar business. We are a four million dollar business. We are a twelve million dollar business.
What I have noticed is that this number is rarely accurate.
It is wrong in a specific direction. Owners tend to overstate the size of their business, often by somewhere between ten and thirty percent. They are not lying. They are not being deliberately loose with the figures. The number in their head has just drifted upward over the years for reasons that have nothing to do with what the business is actually doing.
The drift happens in a few different ways.
The number gets set in a strong year and never gets revised down when the next year is softer. The business once did seven and a half million in a particularly good year and the owner started saying seven and a half million, and the number stuck even though the average across the last three years is closer to six.
The number includes gross revenue from a project that was mostly pass-through. Two hundred thousand of materials, fifty thousand of margin, and the owner is counting the whole two hundred and fifty as their revenue when only fifty of it ever belonged to the business.
The number gets quoted from a forecast rather than from actuals. The business was going to do nine million this year, and the owner has started saying nine million, even though the year actually closed at seven point four.
None of these are dishonest. They are how human memory works in a context where revenue numbers are abstract and the business is something the owner feels rather than calculates.
The reason it matters is that owners make decisions calibrated for the business they think they have. The owner who believes they are an eight million dollar business is making hiring decisions, investment decisions, and lifestyle decisions that fit that business. If they are actually a six and a half million dollar business, every one of those decisions is being made on inflated assumptions, and the gap quietly accumulates as pressure on margin, cash, and the owner’s own time.
There is a particular moment that owners have, sometimes in a financial conversation, sometimes on their own, when they see the actual rolling twelve month revenue on a screen and realise it is not the number they have been saying out loud. The reaction is usually not panic. It is recalibration. A quiet readjustment of what the business actually is, which then changes what the right next moves are.
If you have not looked at your actual rolling twelve month revenue in the last quarter, the number you would say out loud is probably not the number on the screen.
It is worth checking. Most of the decisions you are about to make are calibrated to whichever one of those two numbers you happen to be using.
Murray.
