Revenue is growing but profit isn't – where to look

There is a particular kind of frustration among owners of growing companies. Revenue goes up year after year, headcount grows, there are more customers. And the bottom line stands still. Sometimes it goes down.

The explanation most often given is "we're investing in growth". Sometimes that is true. More often it is a way of saying nobody knows where the money is going, and that can be found out.

Three places where profit disappears

Having looked at this pattern in many companies, I have a short list of where to look first. It is short because the answer is almost always in one of these three places.

1. The customers you shouldn't have

Most companies can tell you which customers bring in the most revenue. Far fewer can tell you which customers are profitable, and it is not the same list.

The large customer who has negotiated the price down three times, demands their own reporting, calls the delivery manager directly and pays at 60 days may well have a negative margin once all the time is counted. But the time isn't counted, because it is spread across five people's calendars and never linked to the customer.

Do the maths. Take your ten largest customers and estimate, roughly, how many hours a month they take in sales time, delivery, administration and support. Multiply by an internal hourly cost. Subtract from the gross margin. The result usually surprises, and it is often the first time anyone in the company has done the calculation.

2. The administrative time nobody sees

When a company grows from 20 to 80 employees, its administrative processes are rarely rebuilt. They are stretched. The same person who did the invoicing on Fridays when there were 20 employees still does it, but now it takes three days and she has a colleague.

That cost doesn't show up in the income statement as "administration". It shows up as staff costs, spread across departments, and it grows roughly in line with revenue even though it shouldn't. An invoicing flow with eleven manual touchpoints costs the same number of touchpoints per invoice whether you send 100 or 1,000 a month.

This is where I most often find the single largest saving, precisely because nobody owns the question. The finance director sees the staff cost, not the process. The operations manager sees the process, not the cost.

3. The price you haven't adjusted

Many owner-managed companies have a price list that was last reviewed when it was set. Costs have gone up every year since. Salaries, rent, materials. The price has been adjusted when a customer complained, which means downwards.

What is unusual is not that the price is wrong. What is unusual is knowing by how much. If you don't have a routine for reviewing prices against actual cost at least once a year, you have probably left a few percentage points of margin on the table. In a company with SEK 50 million in revenue, a few percentage points is more than most efficiency projects deliver.

Why this doesn't show up in the reports

All three problems share one trait: they don't show up in the report the management team receives. The income statement shows totals by account class. It doesn't show profitability per customer, time spent per process or margin per product after cost increases.

So management looks at the right numbers and draws the wrong conclusion, because the numbers that would reveal the problem are never produced. Usually because it would take someone three days in Excel every month, and those three days don't exist.

It is a process and decision-support question as much as a profitability question. The numbers already exist in the business system and the accounts. They just need to be put together in a way nobody has to do by hand.

What you can do this week

Pick one of the three. I would start with customers, because that calculation can be done in an afternoon with a list and an estimate.

Take your ten largest customers. Ask three people who work with them to estimate the hours. Do the maths. If one or two customers turn out to be unprofitable, you don't necessarily have a decision to make, but you have a number to keep in front of you the next time that customer wants to negotiate.

If the calculation turns out to be hard because the time isn't recorded anywhere, that in itself tells you where to start. It is the kind of question I usually help answer in two weeks, with numbers from your own systems rather than estimates.