The short answer: grow profit first and revenue second. Know your margin by customer and by service, price on value, and only chase growth where each extra pound of sales keeps the margin you need. Growth that lowers margin usually needs more cash to fund it.
Why does revenue growth sometimes reduce profit?
- Discounting to win work drags the average margin down.
- Overheads are added ahead of demand and are hard to remove later.
- Low-margin customers absorb a disproportionate amount of management time.
- Cash gets tied up in stock and unpaid invoices as sales rise.
How do you find out where you actually make money?
- Calculate gross margin for each product or service.
- Calculate margin by customer, including the time it takes to serve them.
- Identify the lowest-margin fifth of your customers or work.
- Track overheads as a percentage of revenue so you can see when they creep up.
How can you grow revenue and protect margin?
- Price for value: review prices at least once a year, and link them to the result the customer gets rather than your costs alone.
- Sell more to good customers: repeat and referral work is usually cheaper to win than new customers.
- Set a minimum margin: agree the lowest margin you will accept on a deal before you quote.
- Reprice or stop the weakest work: if a service cannot earn its margin, change it or drop it.
- Add capacity in steps: hire or invest when demand is proven, not ahead of it.
Which numbers should you track?
- Gross margin percentage, by service or product.
- Net profit percentage.
- Revenue per head.
- Debtor days, which show how quickly you turn sales into cash.
- Value of the sales pipeline.
Review them monthly, and look at the trend rather than a single month.
Frequently asked questions
What is a good profit margin for an SME?
It varies by sector, so compare your figures with similar businesses and, more importantly, with your own trend over time. A margin that is falling as sales rise is a warning sign in any sector.
Should I ever accept lower-margin work?
Sometimes, for example to enter a new sector or to fill spare capacity. Decide the limit in advance, set a review date and check that it does not become the norm.
Talk it through with Growth Idea
If you run an owner-managed SME and want to work out where to start, you can book a free discovery call with Growth Idea. We work with established, owner-managed businesses that want measurable growth with less reliance on the founder.
Next steps…
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