Revenue Jaws

Turnover does not make you profitable. It does help, but it is irrelevant to discuss revenue without talking expenses.

I was not the greatest student, however still found myself attending Curtin University, which is a well know school in Perth, studying commerce. More specifically I was completing a Bachelor of Commerce with majors in Banking and Finance.

I was no different to any of my peers. We would sit and listen to these boring lectures and joke about “When am I ever going to need this?”. However, as my corporate journey evolved, they began to make a lot more sense and I started having flashbacks to those boring lectures.

One of my favourite economic terms is “The Revenue Jaws”. A simple model which explains when expenses are growing faster than revenue (the jaws are closing!) and the opposite when revenue is increasing at a greater rate than expenses.

Widening the Jaws

I often refer to it when talking metrics with business owners as the numbers – specifically how they are trending – are easily identifiable. I chose to write about this after reading a recent LinkedIn post from an anonymous connection (anonymous as I chose not to name and shame), spruiking to over 5000 people that “last year we had a turnover that exceeded $1m”. It got me thinking on a number of fronts:-

  1. My father taught us never to talk about your financial situation to anyone else other than family – so why would you broadcast that?
  2. If you had revenue (turnover) of $1m but your expenses were $1.5m, you made a $500k loss! Is that newsworthy?

Having worked in the mortgage broking industry for 20+ years, I have seen several changes to the economics of business.

From an Aggregator perspective, we have seen margins erode quite significantly driven by new entrants into the market and stronger competition. Such a significant erosion has meant less investment back into the business, and the need for Aggregators to drive other revenue streams like White Label lending, Commercial and Asset finance, and even the likes of Legal Services. Unfortunately, technology is not cheap, nor is the adaptation required to meet the changing regulatory landscape, so one would assume the “revenue jaws” would be closing. We have seen consolidation in the industry – none bigger than the recent acquisition of PLAN Australia, Choice and FAST by Loan Market. I read with interest the media releases about running 4 separate business. Over time , there will surely be a need to rationalise the expenses within these 4 entities to “widen the jaws”.

Brokers also face dilemmas, albeit on a smaller scale. Most brokers have negotiated well on the revenue side with deals out their offering 100/100 with monthly fees and even 98/98 with no fees. I am not sure how this happened in the industry, but it is here to stay, and economics need to be reshuffled for everyone to win/win. The same theory applies, it is irrelevant to discuss revenue without talking expenses. Being on a 100/100 split or a 70/70 split, does not talk to the profitability of a business. We need to have a look at expenses, and more specifically who is, or can, pay for them. Can expenses be shared across similar businesses? When is the last time you sat down and understood your P&L?

Any mortgage broking business owners that would like to reach out and discuss their ‘Revenue Jaws’, can feel free to contact me.

Blake Albones

Chief Executive Officer
0422 767 864
[email protected]