Knowledge
Sales grow, but the money does not
I know a company that increased its revenue by 40% within a year. The owner was pleased, the team grew, they moved to a new office and new deals kept coming. At the end of the year it turned out that profit had fallen by twenty percent, with a 40% growth in sales. And nobody noticed until the annual financial statement.
I see this pattern in B2B companies so often that I have stopped being surprised. The number of clients grows, the number of projects grows, the team’s fatigue grows, and what should grow does not.
Before we go further, one caveat. Sometimes a drop in profit with growing sales is a conscious decision, because the company is entering a new segment, deliberately underpricing, reorganizing the offer. An expensive strategy, but a controlled one. The problem I am writing about looks completely different, because the owner does not know at all that they are losing, when nobody measures it.
Where does it come from?
Most often from one mistake that drags all the others behind it. The company does not know what it earns on. Not at the level of “we make software” or “we sell specialist services”, but at the level of which type of project leaves a 35% margin and which barely 8%. Which client generates profit, and which only turnover and the feeling that something is happening.
I see exactly the same thing when I look at the offers of small companies. Marketing agencies do social media, branding, websites, and if needed they will organize an event too. Software houses communicate that they can basically build any software. When a client turns up with a technology they have no experience in, they look on groups for someone to help them. Because cash flow has to be taken care of, so the new client is accepted, even if they do not fit the company’s existing profile. The offer grows, and grows, and grows, while the scale of the company not necessarily.
Worse, I once heard from a business owner that “since we have made our number for the year, and it is September, we can underprice until the end of the year”. Such thinking leads straight to drifting, because the company supposedly works, supposedly grows, but builds no buffers for the future.
Without knowledge of what really brings profit, sales go where they are easiest to deliver. And it is easiest where the client already knows what they want, has a budget and needs someone to deliver. Sounds good, except such a client often runs a “beauty contest” for which many vendors line up, so the price drops, the margin drops, and the company does not see it, because the pro forma went out, the project started and everyone is busy.
Busy, that is the key word.
The growth trap in service companies is that more clients means not proportionally but exponentially more work, because every new project means coordination, onboarding, communication, corrections, problems. In a software house employing 20 people, adding three new clients at the same time can paralyze delivery for weeks. Costs grow, but nobody assigns them to specific projects, because they hang in the air and in Excel simply look like “overheads”.
Paradoxically, the greater a company’s success, the faster it grows, the more money it needs for that growth. If you do not generate surpluses, you will not be able to afford hiring additional people or outsourcing activities you as the owner should stop doing. You will get stuck in operations and instead of a company you will simply create a job for yourself.
Here the owner often makes the second mistake, because they see rising costs, so they try to sell even more to cover them, which means more projects, more clients, even more work, and the circle closes. Besides, it is exactly the same mechanism I see when owners think that if they have few clients, adding something to the offer will bring more. I do not understand, however, how the inability to sell basic solutions is supposed to be solved by a greater number of solutions we will not be able to sell either.
Sales grow, and profit does not.
Sometimes it is not even about the margin on a project, but about something hardly anyone calculates at all, namely the client acquisition cost. How much it really costs to bring one client to signing a contract, not in the sense of marketing spend, but how much time salespeople spend on conversations that do not end in a sale, how many proposals you write per one closed deal, how many meetings, calls, emails and follow-ups you have to go through before someone says “yes”.
When you look more closely at salespeople who show in the CRM how many open sales opportunities they have, how many conversations they are having, how many meetings they attend and generally how swamped they are. And then you look at the individual opportunities, it usually turns out that a large part of them should not be processed at all, because those clients are the wrong ones, have no budget, have completely different technical requirements, and the company is unable to help them. But nobody worked out an ideal client profile, so the salespeople talk to everyone who wants to talk.
In one company we once calculated this precisely and it turned out that the average client acquisition cost was almost as much as the margin from the first project, so the first project with a new client came out at zero, and they only earned from the second one. Except that half the clients did not order further projects, and they did not know this for three years, because nobody looked at those numbers together.
Often the problem is not a lack of sales, but a lack of knowledge about which sales will actually move the company forward and let it earn. Companies operate on a hunch, because when revenue grows, things are probably fine, the team is busy, so we are probably earning, clients keep coming, so we are moving forward.
And then comes the end of the quarter, when VAT, bonuses have to be paid, new equipment bought, servers paid for, and suddenly it turns out that the money in the account is tight. The owner sits in the evening wondering how it is possible: we are doing more than ever and money is short.
What to do about it?
You have to tell yourself honestly that more clients does not have to mean more profit, and more projects does not have to mean a bigger company. As long as you do not know which of these “mores” work in your favour, and which make the company drift.
I know this from my own experience. In one of my companies we did exactly the opposite. Instead of adding, we cut. We gave up web applications, mobile applications, social media management and bet on one specific area of specialization. We expected a drop in revenue, and meanwhile revenue grew by 40%, profits by about 25%. Because a narrow offer made it possible to build a repeatable production process, a sales team that opened new clients through outbound without technical knowledge, and finally to have a sensible margin.
You will not solve profitability problems by selling even more. You will solve them when you sit down and ask yourself the questions you have avoided so far. What exactly do we earn on, how much does each client cost us, exactly which clients do we want to win and which projects should we stop taking.
Especially that last question is the hardest, because it means saying “no” to money lying on the table. But sometimes it is precisely that money that keeps you stuck in place for years.
