When something isn’t working in a business, the instinct is usually pretty simple:
We need more sales. Revenue is down? Get more customers. Cash is tight? Sell more. Profits aren’t where they should be? Increase revenue. And sometimes that is the answer.
But sometimes, pushing for more sales is like sitting in a boat with holes in the bottom and deciding the solution is to paddle harder. You might move faster, but you’re still taking on water.
Before You Chase More Revenue, Find Out Where the Money Is Going
I talk to a lot of entrepreneurs who know their sales numbers very well. Ask them how much revenue they did last month and they can probably tell you. Ask them what their gross margin was, which products or services were most profitable, or why there seems to be less cash in the bank than there should be, and the answer is often less clear.
That’s where the problem starts.
Revenue tells you how much money is coming into the business. It doesn’t tell you how much of that money you’re actually keeping. Imagine a company sells $1 million a year and makes $100,000 in profit.
The owner decides the business needs to grow, so they push sales to $1.5 million. That sounds great. But what if getting those additional sales requires more employees, more overtime, more inventory, more subcontractors and more overhead? What if the additional work is being sold at a lower margin?
Suddenly, the company is doing 50% more revenue, everyone is busier than ever, and the owner is wondering: Why aren’t we making any more money?
That’s the leak.
Not All Revenue Is Good Revenue
One of the most important things an entrepreneur can understand is that a dollar of revenue is not automatically a good dollar of revenue. Suppose you offer three different services.
Service A has a healthy margin. Service B is okay. Service C generates a lot of sales, but once you account for the labour and other costs required to deliver it, there isn’t much left.
If you don’t know that, you might look at Service C and think: This is selling really well. We should do more of it.
Sales increase. Your team gets busier. Your costs increase. But your net profit barely moves. You’ve just worked harder to make the leak bigger. This is why revenue shouldn’t be looked at in isolation; you need to understand what is happening underneath the revenue.
Sometimes the Leak Is Pricing…or Costs
You can have a great product, happy customers and growing sales and still have a pricing problem. This is especially common in businesses where costs have gradually increased: wages go up, suppliers charge more, shipping gets more expensive, software subscriptions creep higher. The business absorbs each increase without adjusting its pricing. Nothing dramatic happens overnight, so the problem is easy to miss, but the margin slowly gets squeezed.
Eventually you’re selling the same amount, or even more, and keeping less of it. More sales won’t necessarily solve that. Better pricing might.
The same erosion can happen from the expense side as a business grows: another employee, another piece of software, another vehicle. Individually, each decision may make sense. Collectively, they can change the economics of the business, and that doesn’t mean the answer is to slash every expense; some costs are necessary to grow.
The important question is: Are you getting enough value from what you’re spending? You can’t answer that properly if you’re only looking at the top-line sales number.
And Sometimes the Business Is Profitable but Still Has No Cash
This one confuses a lot of entrepreneurs. Your accountant tells you the business made money. Great. Then you look at the bank account and wonder where all that money went. Profit and cash are not the same thing.
You may have customers who haven’t paid you yet. You may have money tied up in inventory. You may have made large debt payments or equipment purchases. You may simply be paying your suppliers much faster than your customers are paying you. It’s why growing businesses can suddenly run into cash flow problems, even when they’re profitable.
So once again, the instinct to “go sell more” can miss the actual problem. In some cases, the business doesn’t need more sales nearly as badly as it needs to collect the money it has already earned.
The Problem With Looking at Your Numbers Once a Year
You can’t fix a leak you don’t know exists. Your year-end financial statements are important. Your tax return is important. But if I tell you in March that your margins were deteriorating the previous June, what are you supposed to do with that information? Entrepreneurs need to understand what’s happening while there’s still time to do something about it.
That means looking at things like:
- gross margins by product, service or customer
- cash flow
- costs
- Accounts receivable collection time
- Inventory levels
- Budgets-to-actual results
- Business-specific KPIs
- actual results compared with expectations
And more importantly, someone needs to help you understand what those numbers are actually telling you.
Knowing which financial reports your business should be reviewing every month can help you see those problems while there’s still time to act.
Your Financial Statements Should Help You Run the Business
Ultimately, when we look at financial statements, we don’t just see a bunch of numbers; we see a story unfold. Maybe sales are growing but margins are falling. Maybe one service is carrying another. Maybe you’re profitable on paper but constantly short on cash. Those are very different stories, and they lead to very different decisions.
That’s why the first question shouldn’t always be: How do we get more sales? Sometimes the better question is: What is happening to the money we’re already making?
Entrepreneurs Have a Habit of Paddling Toward the Next Thing
Entrepreneurs love the next opportunity. The next idea. The next shiny object.
So we made a fun short adventure film about an entrepreneur who literally gets in a boat and goes chasing one.
Fix the Leaks. Then Paddle Harder.
We’re certainly not against growth, but growth works a lot better when the underlying business is healthy. If your pricing works, your margins make sense, your costs are under control and you understand your cash flow, additional sales can be incredibly valuable. That is a boat without leaks, therefore when you paddle harder, you’re moving a lot faster.
That’s the role our Financial Controller Services are designed to play. We help entrepreneurs get accurate monthly financial information and understand their profitability, margins, cash flow, KPIs and costs so they can see where the business may be leaking money, and make decisions based on what is actually happening.
Entrepreneurship is a voyage. Some stretches are calm, some are rough, but none of it matters if you’re still bailing water. Fix the leak first. Then paddle harder.
Not Sure Where Your Business Is Leaking Money?
More sales won’t fix problems with pricing, margins, costs or cash flow. If you’re not sure what’s happening beneath the surface, we can help you figure it out.
