Revenue is Growing But is Your Business Actually Becoming More Profitable?

Just because your business is seeing a growth in revenue, it doesn’t mean your profits are increasing.

Revenue isn’t an accurate measure of whether a company is becoming more profitable, so what is the difference between revenue and profit? What KPIs should a firm measure and what does profitable improvement look like?

Revenue vs Profit

Revenue is the total money a business makes from selling products or services, before any costs are paid. Profit is what is left over once all the expenses have been paid.

However, revenue is not always profitable for a business. The costs of increasing revenue can rise at the same rate, or faster than profit margins resulting in a rise in revenue but the same or less profit.

To understand if revenue is generating profitable growth, businesses need to consider a range of financial measures.

• Gross profit margin – The percentage of total sales left after subtracting the cost to make a product.
• Operating profit margin – The percentage of revenue a business keeps as profit after paying for production and day-to-day costs but before taxes and interest.
• Net profit margin – The percentage of revenue a business keeps after paying all expenses, taxes and costs.
• Contribution margin – The amount of sales revenue left over after subtracting all variable costs.
• Customer acquisition cost – The total amount of money a business spends on sales and marketing to win a single new customer.
• Customer lifetime value – The amount of net profit a business expects to make from a single customer over the entire course of their relationship.
• Break-even point – The exact stage when a business’s total sales revenue equals its total costs.
• Return on investment – The percentage that records the amount of profit and loss made on an investment compared to its cost.

The Gap Between Revenue Growth & Profit Growth

Rising costs

• Increase in cost of delivery
• Customer acquisition costs growing from expanding advertising, less effective channels or market saturation
• Subscription costs from needing additional software

Operations

• Jobs taking longer than expected
• Incorrect quoting
• Capacity restrictions
• Extra admin from additional customers

Pricing

• Not adjusting pricing alongside rising costs
• Sales or discounts that reduce the profit margin per sale

Labour

• Payroll growing faster than revenue

The pressures of keeping up with sales can often cause processes and costs to fall behind where the outcome is a gap between revenue growth and profit growth.

Which Profitability KPIs Should A Small Business Track?

Businesses need to track their Key Performance Indicators (KPIs) because they provide measurable data about company performance and identify whether a business is going in the right direction to achieve their goals.

The main KPIs small businesses should consider when tracking profitability include revenue, gross profit margin, operating margin and net profit margin.

Each of these KPIs measures a different stage of the business’s financial performance.

Together, these KPIs reveal where value is being created or lost as a business grows. They enable small businesses to distinguish profitable growth from growth that adds revenue which disproportionately increases direct costs, overheads or financial grow pressure.

How Often Should They Be Reviewed?

The frequency of reviewing KPIs is individual to each business, depending on their goals, industry, company operations and more. It is dependent on the KPI too, with each recommended review period differing.

Depending on the time-sensitivity of measurements, some businesses may feel the need to review their KPIs daily. It’s suggested that operational KPIs should be reviewed weekly, financial KPIs monthly and strategic KPIs that are measuring long-term performance may only need quarterly or annual reviews.

They need to be reviewed frequently enough though in order to identify trends and make adjustments where required to achieve business goals.

What Does Profitable Growth Look Like?

Profitable growth is the expansion or an investment that contributes to the bottom line. This involves increasing revenue and maintaining or improving healthy profit margins on every new sale.

When revenue increases, companies should see gross profit margins remain stable or improve with operating costs growing at a slower rate than revenue. This is also known as sustainable growth, expansion should generate steady financial buildup.

The cost of gaining new customers should be justified with the value they are creating for the business.