Your business has just had one of its best months ever.
Sales are up.
The order book looks good.
Everyone is busy.
Yet somehow, there still does not seem to be much money left.
That should get your attention.
Because more turnover does not automatically mean a better business.
Sometimes, every extra sale you make can actually make the underlying problem worse.
Turnover is only part of the story
I worked with a business turning over around £1.2 million.
Over two years, they had increased sales by roughly £250,000.
For a business of that size, that looked like strong growth.
Their marketing was working. Their order book was good. Their pipeline looked healthy. There was every reason to believe turnover could continue climbing.
But when we looked at the management accounts, something did not add up.
The profitability was not there.
Neither was the cash.
So we looked further under the bonnet.
And the real issue became fairly obvious.
This business did not have a sales problem.
It had a gross margin problem.
Where was the profit going?
There were several leaks.
Discounts were being given away too easily.
Some work was coming back because of quality issues.
Certain jobs were taking longer than expected.
Material costs had not been properly reviewed or negotiated.
Sales were growing, but so were the problems sitting behind those sales.
That is why looking at turnover on its own can be dangerous.
You can have a record month and still weaken the business.
£10,000 of turnover is not always £10,000 of turnover
Here is a very basic example.
Imagine you complete a £10,000 job at a 40% gross margin.
That gives you £4,000 of gross profit.
Now imagine another £10,000 job at a 20% margin.
That gives you £2,000.
Same turnover.
Completely different result.
To generate the same gross profit as the first job, you now need to complete two of the lower-margin jobs.
That means more work.
More staff time.
More capacity.
More opportunity for mistakes.
Potentially more cash tied up.
And probably more stress for the owner.
This is why chasing turnover for the sake of turnover can turn you into what I call a busy fool.
Plenty going on.
Not enough to show for it.
Stop giving your margin away
One of the biggest problems we found was discounting.
There is nothing automatically wrong with giving a discount.
But there should be a reason for it.
If you are reducing your price simply because somebody asks, you are giving away profit that your business may need.
A discount might make commercial sense if something valuable comes back the other way.
Perhaps there is a larger commitment.
Maybe there is a referral opportunity.
Maybe the customer is providing a useful testimonial or there is another genuine commercial benefit.
The point is that discounts need control.
They should not be handed out because you feel uncomfortable defending your price.
Know which customers and jobs actually make money
The first thing we helped this business do was understand profitability by customer and by job.
That sounds obvious.
But many businesses do not know it.
They know which customers spend the most.
They know which jobs are the biggest.
They may even know which customers have been with them the longest.
But they do not necessarily know which ones actually leave the most money behind.
That is a much more useful number.
Once you understand profitability at that level, you can start separating the genuinely good work from the work that keeps everyone busy without producing enough profit.
Review your costs and pricing properly
Costs change.
Supplier prices move.
Wages increase.
Delivery becomes more expensive.
Customers demand more.
Jobs become more complicated.
Yet plenty of businesses continue pricing work using numbers that were decided years ago.
That is how margin slowly disappears without anyone noticing.
Your pricing should reflect what it costs you to deliver the work today, not what it cost several years ago.
That does not mean blindly putting every price up.
It means understanding the numbers well enough to know whether the current price still makes commercial sense.
Put the important numbers on a scorecard
The fourth thing we introduced was a simple scorecard.
The aim was not to create another report for somebody to file away and forget.
It was to give the owner visibility.
What is happening to gross margin?
Which jobs are performing well?
Where are costs moving?
Are discounts increasing?
Is profitability improving or deteriorating?
The sooner you can see a problem, the sooner you can do something about it.
Your accounts should help you make decisions, not simply tell you what went wrong six months later.
What happened next?
Interestingly, this client’s turnover reduced.
And that was a good thing.
They became more selective about the work they accepted.
They improved control over pricing, costs and discounts.
And profitability increased significantly.
That profit started turning into cash.
The owner had fewer sleepless nights.
There was more money available to invest back into the business.
And there was more money available for the owner to actually enjoy outside the business too.
That is the bit that gets forgotten when people obsess over growth.
The purpose of building a bigger business should not simply be to create a bigger workload.
The business should ultimately give the owner more options.
You do not need to win every job
This is probably the biggest takeaway.
You do not need to win every piece of work.
You need to win the right work.
That means understanding your gross margin, your profitability, your delivery costs and how efficiently your team performs.
It means knowing which customers are good for the business and which ones constantly demand more while leaving very little behind.
And it means being willing to say no occasionally.
Because bigger is not always better.
Better is better.
If your turnover is growing but your profit and cash are not following it, it is worth looking at the numbers properly.
You may not need more sales.
You may need better sales.
If you want help understanding what is actually happening inside your business, speak to MDH about your numbers. Alternatively, our Business Growth Programme is designed to help business owners get more clarity over areas including profitability, cash flow and growth.
