There is a particularly annoying stage in the growth of a business when sales go up, everyone gets busier, and somehow there is no extra money.
You look at the sales report and feel quite pleased. Then you look at the bank account and wonder whether somebody has been quietly stealing from you.
Usually, nobody has. The extra sales have simply brought a large group of hungry costs along with them.
Some of those costs are obvious. More work needs more people, contractors, materials or freight. Others sneak in through the side door: extra software licences, recruitment fees, overtime, rework, management time and the expensive habit of solving every capacity problem by employing another person.
This is why turnover is a rather unreliable measure of success. A million dollars of extra sales sounds impressive at a barbecue. It is less impressive if it takes $990,000 to deliver.
The important question is not, “How much did sales grow?”
It is, “How much of each additional dollar did we keep?”
Start with contribution margin. That is sales less the costs that genuinely increase when you do more work. In a professional services business, this might include employee and contractor time. In a product business, it will include stock, production, freight and commissions.
Be honest about it. If delivering a project requires senior people to rescue it every Friday afternoon, that time belongs in the cost of the project. It is not free merely because those people are already on salary.
Then look at how the work arrives.
Businesses often accept poor-margin work because it keeps everyone busy. Unfortunately, being busy is not an objective. A badly priced client can occupy the same people and equipment as a good one, while producing considerably more complaints and much less cash.
Sometimes the answer is to put prices up. Sometimes it is to narrow the service, change the process or politely stop doing that type of work. Often it is a mixture of all four.
You also need to separate costs that support today’s sales from costs intended to create tomorrow’s business. A new sales manager may be a sensible investment, but don’t pretend the cost disappeared merely because you used the word “growth”.
Report it clearly. Measure margins by client, service, product, team or location—wherever the economics of your business genuinely change. Overall gross margin can look perfectly respectable while one enthusiastic part of the company quietly eats the profits made by another.
None of this means cutting every cost. Good businesses spend money. They just know why they are spending it and what result they expect.
Growth should make the business stronger. It should give you more cash, better people, better systems and more choices.
If sales rise but none of those things improve, you have not really grown.
You have simply built a larger machine that is hungrier than the old one.
And you will have created more work for yourself in the process.