Turnover Up. Profit Down

The Growth Trap: When More Sales Make You Poorer

Turnover can be a comforting number.

It grows, the business looks busy, and from the outside everything appears to be moving in the right direction. But turnover can also hide problems that are quietly destroying profit underneath.

I learned this lesson the hard way.

In the first year of one of my businesses, we turned over about £650,000. A solid start. The following year the business accelerated and revenue jumped to nearly £1.88 million.

From the outside it looked like success.

Inside the accounts, profit had almost halved.

The culprit was not lack of work. It was cost. Salary costs and staff expenses had grown faster than the margin on the work we were doing. The business looked stronger but was actually becoming less profitable.

It is a trap many directors fall into. Growth creates complexity. More staff, more overhead, more moving parts. Unless margin is monitored carefully, the extra revenue simply feeds a bigger cost base.

That is why margin matters more than turnover.

A useful discipline is to monitor the margin weekly. Not annually. Not quarterly. Weekly. A short report that shows revenue, direct costs and margin movement can reveal problems early.

Pricing also needs regular attention. Costs change constantly. If pricing stands still while expenses creep up, the business slowly gives away its profit.

And remember one simple calculation.

If your margin is 30 percent and you give a 10 percent discount, you are not just trimming the price. You are cutting roughly a third of your profit.

That kind of discount might win the job, but it changes the economics of the work dramatically.

Turnover is exciting. Margin is what pays the bills.

Keep an eye on it every week.