Read on to find out… why a growing order book can sometimes hide a business that is becoming less profitable, less resilient and more cash hungry.
A surprising fact
Many owner-managed businesses can tell you their latest sales figures instantly.
They know how many quotes have gone out, how many orders have been won, and whether turnover is higher than it was this time last year.
Yet ask a different question:
“Are we actually making more money?”
The answer is often less clear.
It’s an easy trap to fall into. Growth feels positive. New customers create excitement. A full pipeline provides reassurance. More activity creates the impression that the business is moving forward.
But turnover is not the same as profit. And profit is not the same as cash.
We’ve seen businesses experiencing some of their busiest periods ever while simultaneously feeling increasing pressure on cash flow. The owner is working harder, the team is busier, sales are up, yet the bank balance never seems to reflect the effort.
The assumption is often that more sales will solve the problem.
In reality, more sales can sometimes make it worse.
A growing business often needs to fund more stock, higher payroll costs, increased overheads and customers who take longer to pay. If margins are shrinking at the same time, every new sale may be generating activity without creating meaningful profit.
It’s what might be called “revenue addiction”.
Success becomes measured by sales won, orders booked and turnover growth rather than by what actually remains in the business once the costs of delivering that work have been paid.
A better approach
Financially healthy businesses understand the difference between four distinct measures:
Activity
How busy the business is.
Revenue
How much has been sold.
Profit
How much is left after the costs of generating those sales.
Cash
How much money is actually available to run and grow the business.
These measures are connected, but they are not interchangeable.
Think of it like driving a car.
Revenue is your speed.
Profit is fuel efficiency.
Cash is the fuel in the tank.
A business travelling fast without enough fuel will eventually run into trouble.
The answer isn’t to stop growing. It’s to understand whether growth is creating value.
Some useful questions include:
- Which customers, products or services generate the strongest margins?
- Is turnover growing faster than profit?
- How long does it take customers to pay?
- How much cash is required to support future growth?
- Would selling more of our least profitable work actually improve the business?
You don’t need to become an accountant to answer these questions. You simply need visibility of the numbers that drive business performance.
Our Views
At Insight Associates, we often find that businesses aren’t short of information.
They’re short of the right information.
Most accounting systems can tell you what happened last month. Far fewer business owners are using financial information to understand what will happen next.
That’s where management information becomes valuable.
When owners can clearly see the relationship between activity, revenue, profit and cash, they make better decisions. They price with greater confidence, invest more effectively and recognise problems before they become cash flow crises.
Growth is important.
But growth that consumes cash, reduces margins and increases stress, is rarely the type of growth business owners are aiming for.
The most successful owner-managers don’t just measure how much business they’re winning.
They measure how much value they’re keeping.
And that’s a very different number.
If this article has prompted you to look beyond turnover and ask tougher questions about profit, margins and cash flow, we’d be delighted to help.
At Insight Associates, we work with owner-managed businesses to turn financial information into practical management insight, helping owners understand what is really driving performance and where opportunities for improvement exist.
To arrange an informal conversation, get in touch with our team.
Looking beyond turnover? Let’s help you make sense of profit, cash and growth.
Get in touch with Insight Associates — we’d be happy to help.
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