A full diary, new enquiries coming in, sales increasing, more work in the pipeline. For most business owners, these all feel like signs that things are going well. And they can be.
But there’s an important question to ask: is all that extra work actually making your business more profitable?
Being busy and running a profitable business aren’t necessarily the same thing. In fact, if your costs are increasing faster than your prices or you’re taking on the wrong type of work, you could find yourself working harder without seeing much improvement in your bottom line.
More sales don’t always mean more profit
It’s easy to focus on turnover when your business is growing. If sales are increasing, surely that’s good news? Not necessarily. Taking on additional work often creates additional costs. Depending on your business, that might include:
- employing more staff or paying overtime;
- buying additional materials or stock;
- higher fuel and travel costs;
- investing in new equipment;
- paying for additional software or subscriptions; and
- increased premises or operating costs.
Individually, some of these costs might not seem significant. Together, they can quickly eat into the additional revenue you’re generating. If your prices haven’t increased alongside your costs, your turnover could be going up while your profit margin is going in the opposite direction. That’s why turnover alone doesn’t tell you whether your business is performing well.
Business growth can put pressure on cash flow
There’s another potential downside to rapid growth: cash flow.
As your business gets busier, you may need to spend more money before you receive payment from your customers. Perhaps you need to purchase stock or materials upfront. You might need to recruit another employee, invest in equipment or pay suppliers within 30 days while your own customers don’t pay you for 60. Suddenly, you’ve got more business than ever but less cash available in the bank. This is sometimes referred to as overtrading, when a business grows more quickly than its working capital can comfortably support.
A business can be profitable on paper and still experience serious cash flow problems. That’s why managing cash flow becomes particularly important during periods of growth.
Are you taking on profitable work?
Not every customer, project or sale contributes equally to your bottom line. One £10,000 project might be significantly more profitable than another £10,000 project once you’ve accounted for the time, materials and other costs involved in delivering it. It’s therefore worth looking beyond how much work you’re winning and considering which work is actually making you money.
Understanding the profitability of different services, products, projects or customers can help you make better decisions about where to focus your time. Sometimes, saying no to low-margin work can be better for your business than filling every available space in the diary.
Know the numbers that really matter
Rather than judging business performance solely by turnover or how busy you are, there are several figures worth monitoring regularly.
- Gross profit shows how much you’re making after the direct costs associated with delivering your products or services.
- Net profit takes your wider business expenses into account and gives you a clearer indication of what the business is actually making.
- Cash in the bank tells you what money is available right now, something your profit figure alone can’t tell you.
- Money owed by customers can highlight whether late payments are beginning to put pressure on your cash flow.
You should also keep an eye on upcoming VAT and tax liabilities. A healthy bank balance can quickly look very different if some of that money needs to be set aside for HMRC.
Looking at these figures together provides a much clearer picture of the financial health of your business.
When did you last review your prices?
If your business is busier but profits aren’t improving, your pricing is one of the areas worth reviewing. Your costs may have risen significantly since you originally set your prices. Wages, materials, utilities, fuel, insurance and software can all increase over time. If your prices have stayed the same, you’re effectively absorbing those additional costs yourself.
Increasing prices can feel uncomfortable, but regularly reviewing them is an important part of running a sustainable business. The goal isn’t simply to charge more. It’s to make sure the work you’re doing generates enough profit to justify the time, resources and costs involved.
Work smarter, not just harder
Growth isn’t simply about winning more customers or generating more sales. Sustainable business growth means taking on the right work, at the right price, while having enough cash available to support that growth.
So, if your diary is full and your turnover is rising, that’s great. But take a moment to look beyond the headline figures.
- Are your profit margins healthy?
- Is cash flow keeping up?
- Are your prices still appropriate?
- And, ultimately, is all that extra work actually leaving you better off?
Being busy can be a sign of a successful business. Being busy and profitable is much better.
Is your business growing profitably?
If you’re working harder and generating more sales but aren’t seeing the improvement in profits you’d expect, it may be time to take a closer look at your numbers.
At Greystone Advisory, we can help you understand what’s driving your profitability, identify potential cash flow pressures and spot areas where your business could be performing better. Contact us to arrange a conversation about your business finances.
