The ugly side of business growth
Ok, so you’ve reached your sales goal... now what? Is it all it’s cracked up to be? Let’s jump into that today! It’s a new week, I hope you’re doing well, Thomas Joyner with Business on Purpose here.
I’ve seen businesses that earn 300k with an 80% margin... and I’ve seen million-dollar businesses with 3% margin. You tell me which you’d rather have!
You see, we hear these massive sales numbers all the time and the owner’s exclaiming they’ve arrived! But that’s never how we measure success. $500k, a million, 10 million dollars...it really doesn’t matter. Because you can bring in all the money you ever dreamed of, but if you’re not profitable, you run the risk of working for free and getting stuck answering to a business that will demand everything from you with no payoff in the end.
Don’t believe me?
I was working with a business just a few months ago. “We did it! We landed the contract. Sales will increase by 50% next year by signing this one whale to a long-term contract.”
“That’s amazing! Congratulations... how’s your margin priced in there?” I asked, just wanting to double-check and not regret it later.
“Oh, it should be between 18 and 20% depending on a few pieces of efficiency and if we have to buy any new equipment.” Awesome, let’s look at it.
Well, we started jumping in the numbers and realized quickly that it was not as peachy as it seemed.
“We’ll need to hire a new manager and a new team of subs to make sure we handle all of this extra work. The manager is gonna need a truck, and a trailer and insurance goes up, and our equipment isn’t geared to really handle this scale of work, so we’re gonna need 30-40k of equipment.”
Can you feel the margin shrinking, or is it just me?
We got all the way to the end and pressed enter on our calculations. Had they just moved forward without truly looking at the numbers, they would have lost 12% on the year. Now, maybe they could have survived it. Maybe they had enough in reserves to make it, and granted, some businesses start out knowing they will lose money for a year or two before becoming profitable.
But the differences is those businesses are prepared to take that hit. They have cash reserves to weather the storm! When you’re expecting an 18% margin and lose 11-12% that’s a gut punch you are NOT ready for.
So, we started making some cuts. We went back to the profit first model and started building in another bank account for capital purchases. That way we can pay cash for new equipment as it becomes available in a few months.
Once we ran the numbers again, we landed at a healthy 7-8% margin (which is really good for this business) for year one.
Guys, that’s success. A lot of people can bring in sales. A lot of people can land the big deal because they undercut prices so they have razer these margins and have no chance if, and when, something goes wrong.
But that’s no way to run a business. That’s a huge reason we use the multiple bank accounts model. So that we can spy on our finances, make quick, informed decisions that will keep us profitable. It’s way easier to course correct early on than to try to make up for poor decisions.
So, do you know your numbers? Have you sat down and truly checked to see what your margin is going to be or are you bragging about top-line revenue thinking it will magically figure itself out?
If so, that’s going to get you into a world of trouble down the road.
Hear me say this... top-line revenue matters, but not if the system is not in place to handle all of the work. So, if you can do the work on the front in to make sure you can maintain the margin, that is how we measure success.
This is the ugly side of business growth. We overextend ourselves and our entire team struggles. But... had we thought through it and put in the work to build out a system that is able to handle more revenue, we can sit back and truly be proud of the business we’ve built. One that is secure, ready to handle anything, and structured to last a long, long time.
I hope that makes sense and would love to chat with you if it doesn’t. Let me know!
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Have a great week!