There are several memorable quotes from The Princess Bride but there is one exchange that I have always loved:
Vizzini: He didn’t fall? Inconceivable.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.
I have been accused, occasionally of misusing words but I rarely make one up completely. I have been working on a new word for a while, however: Marginable Revenue.
Marginable Revenue is not the same thing as marginal revenue (which is what Google tries to suggest) nor is it the same as contribution margin. Let me explain what marginable revenue is.
I have worked for two companies that are service companies that purchase a great deal of supplies and services from sub-contractors and pass them on to their clients with zero mark-up. If we paid $1 for something then our client paid $1 for something. We made our money through administrative and program fees.
We still counted the pass-through costs as top-line revenue, however, even though they would be zeroed-out by an expense line down to the last penny. Why would we do this? It made our companies look larger than we actually were. Top-line revenues could be shown to be several times larger than what our administrative and program fees were was but our operating margins and EBITDA were minuscule.
It was an accounting trick that tired to obscure the actual operating financials of the companies. It is a tempting option but one than can render decision making more difficult than it should be. That is why I like to evaluate marginable revenue.
Marginable revenue (by my definition) only looks at top-line revenue that has margin attached to it and, therefore, could contribute to the organization’s bottom line. Any pass-through revenue would be ignored, which give a more accurate view of what is happening inside the business.
While this may mean that a company feels “smaller” than they used to, what does it really matter how much top-line revenue you have if none of that revenue carries any margin?
