- While it may be quite impossible to achieve a 5% revenue growth without any increase in cost, it is not impossible to expect a slightly lesser increase in cost compared to revenue. For a company with margin of 10%, a 5% rise in revenue and 4% increase in cost result in profit growth of 14% and this figure is 24% for a company with margin of 5%. This is possible through economies of scale like bulk purchase, a lower staff cost, depreciation and interest expense per unit, and more importantly the awareness of the management to control cost.
- It is possible though to achieve a growth in revenue at a minimum increase in cost for company providing a service instead of selling products. For these type of companies, the bulk of the cost is usually fixed cost and not variable cost as they are not working much from the inventory which often occupies most of the variable cost. For e.g. for a brokerage firm, a significant increase in trading volume will not result in much increase of cost as at most a few more people will be hired to handle the volume, but such cost will not be in proportion to the rise in revenue. This explained my preference for companies with similar cost structure.
In conclusion, cost is a very important variable in the profit equation that people might not have been concerned with. However, there is definitely a limit as to the extent that a company is able to grow its revenue infinitely. But, neither is it feasible for a company to be able to cut its cost forever. What i wish to emphasize then is that management should pay more attention to cost control. During a recession, there will always be news that company XXX will be exercising cost control through a retrenchment exercise or other methods like cutting down on sponsorship or advertising. In the first place, why can't a company keep itself lean right from the start to enjoy a fatter profit margin and higher cashflow?