Growing Turnover, Shrinking Margins: Is Your Business Really Growing?

Growth is something almost every business owner wants.

More customers. More sales. A bigger team. Higher turnover.

And when your turnover moves from £500,000 to £750,000, or from £750,000 to £1 million, it certainly feels like the business is heading in the right direction.

But there’s another number that matters just as much.

How much of that additional turnover are you actually keeping?

Because a business can grow significantly in size while becoming less profitable at the same time.

More sales don’t automatically mean more profit. And if your turnover is climbing while your margins are shrinking, it may be time to look more closely at what your growth is actually delivering.

Turnover is only part of the story

Turnover is an easy number to focus on.

It’s tangible. It’s measurable. And when it increases year on year, it gives you a clear sense of progress.

But turnover tells you how much money your business generates in sales.

It doesn’t tell you how much it costs you to generate those sales.

Consider two businesses.

Business A turns over £750,000 and generates £100,000 in profit.

Business B turns over £1 million but generates £50,000 in profit.

Which would you rather own?

There are obviously many other factors involved, but it illustrates an important point:

A bigger business isn’t automatically a more profitable business.

What happens to your margins as you grow?

Your profit margin essentially tells you how much of your revenue remains after costs.

As a business grows, you would hope that profit grows alongside turnover.

But that doesn’t always happen.

Perhaps sales have increased by 20%, but wages have increased by 30%.

Maybe you’ve had to take on additional premises, vehicles, software or equipment to service the extra work.

Supplier costs might have increased.

You may be discounting more heavily to win larger contracts.

Or perhaps the business has simply become less efficient as it has grown.

Individually, these changes might not seem dramatic.

Collectively, they can steadily eat into your margins.

More work can sometimes mean less money

It’s one of the more frustrating situations for a business owner.

Everyone is busier than ever, but the additional work isn’t translating into significantly more profit.

That’s when it’s worth asking whether every sale, customer, contract or service is actually contributing what you think it is.

For example, you may discover that one particular service generates substantial revenue but requires so much staff time that its margin is relatively small.

Another service might account for a much smaller percentage of turnover but be considerably more profitable.

The same can apply to individual customers.

Your biggest customer by revenue isn’t necessarily your most profitable customer once you consider the time, resources and costs associated with servicing the account.

Understanding that can change how you think about growth.

Are you pricing for the business you have today?

Pricing is another area where margins can quietly become squeezed.

Your prices may have made perfect sense two years ago.

But have your costs stayed the same?

Think about what has changed within your business:

• salaries and employment costs
• supplier prices
• insurance
• energy
• rent
• software subscriptions
• borrowing and finance costs
• professional fees
• transport and delivery costs

If your costs have risen but your prices haven’t kept pace, you may now be working harder to make the same — or even less — profit.

Increasing prices can feel uncomfortable, particularly when you’ve built long-standing customer relationships.

But regularly reviewing whether your pricing reflects the true cost of delivering your product or service is an important part of running a sustainable business.

Growth has a cost

Growing a business often requires investment before you see the financial return.

You might need to recruit additional staff before taking on more customers.

You could need new equipment, vehicles or premises.

Larger contracts may require you to purchase materials well before your customer pays you.

More employees bring additional payroll costs every month, regardless of when customers settle their invoices.

That doesn’t mean growth is a bad thing.

Far from it.

But it does mean growth needs to be planned and funded.

Otherwise, a business can find itself achieving record sales while simultaneously experiencing pressure on both profit and cashflow.

The numbers worth watching

If you want to understand whether your business is genuinely growing, turnover shouldn’t be viewed in isolation.

There are several other figures worth monitoring.

Gross profit

Gross profit shows what’s left after the direct costs associated with producing your goods or delivering your services.

If turnover is increasing but gross profit isn’t keeping pace, it’s worth investigating why.

Gross profit margin

Looking at gross profit as a percentage of sales makes it easier to see whether margins are strengthening or weakening over time.

Even a relatively small reduction can become significant as turnover grows.

Net profit

This is what’s left after the wider costs of running the business are taken into account.

Ultimately, increasing turnover is much less exciting if your bottom line isn’t improving with it.

Overheads

As businesses grow, overheads have a habit of growing too.

Some additional costs will be necessary. Others can creep in without being properly reviewed.

Keeping an eye on overheads can help prevent the cost base from expanding faster than the business can comfortably support.

Cashflow

A growing, profitable business can still experience cashflow difficulties.

If you’re spending money to deliver work weeks or months before receiving payment, rapid growth can actually increase the amount of cash the business needs.

Profitability and cashflow therefore need to be considered together.

Don’t just compare this year with last year

Another useful step is to compare your actual performance against what you expected to happen.

If turnover is ahead of budget, that’s positive.

But what happened to profit?

If sales increased by £200,000, how much additional profit did that generate?

If you’ve recruited three additional people, has the increase in capacity translated into the expected financial return?

If you’ve invested in new technology or equipment, has it improved efficiency?

This is where management accounts and regular financial reviews can become much more useful than waiting for your year-end figures.

They allow you to spot trends while there’s still time to respond.

Sometimes the answer isn’t more sales

When profitability is under pressure, the instinctive response can be:

We need to sell more.

Sometimes that’s absolutely right.

But sometimes selling more of something with a poor margin simply creates more work without solving the underlying problem.

The better questions might be:

Do we need to improve our pricing?

Are there costs we need to address?

Which products or services are most profitable?

Are there areas of the business that are taking too much time for too little return?

Could we improve efficiency before increasing volume?

A focus on profitability can sometimes reveal that the best route to a stronger business isn’t simply doing more.

It’s doing the right things better.

What does good growth look like?

There isn’t one number that defines a successful business.

For some owners, the goal will be rapid expansion.

For others, it might be increasing profit without increasing workload.

Some will want to build a business they can eventually sell, while others want to create a stable company that provides a good income and quality of life.

But whatever your ambition, growth should ultimately make the business stronger.

That means understanding not only:

How much are we selling?

But also:

What are we making from those sales?

Look beyond the headline number

At Exchange Accountants, we encourage business owners to look beyond turnover and understand the numbers sitting underneath it.

Regular management information, cashflow forecasting and financial reviews can help you identify changing margins, rising costs and potential pressure points before they become bigger problems.

Because reaching the next turnover milestone can be a fantastic achievement.

But the real question is:

Has your business become more profitable, more sustainable and more valuable as a result?

If your turnover is growing but you’re not seeing the impact on your bottom line, it may be worth taking a closer look at why.

Let’s Grow Together.