Revenue vs profit: is your business growth actually profitable?
Key Takeaways
Revenue growth doesn’t always mean increased profitability, so it’s important to look at profit margins and costs alongside sales.
Keeping track of cash flow as your business grows can help you understand whether you have enough cash available to meet your financial commitments.
Keeping your bookkeeping up to date and regularly reviewing your management accounts can help you make better, more informed decisions and spot potential issues early.
Is your business growth actually profitable?
More customers, more work and rising sales are all positive signs for a growing business. But being busier doesn’t necessarily mean you’re becoming more profitable.
As your business grows, your costs often grow with it. You may need more people, new equipment or software, additional space or increased supplier spend. You may also find that some products, services or clients are considerably more profitable than others.
That’s why looking beyond revenue is so important. Understanding your revenue, profit margins, costs and cash flow gives you a much clearer picture of how your business is really performing and whether your growth is working for you.
What is the difference between revenue and profit?
It’s natural to look at sales or revenue when judging how well your business is doing. If you brought in more money this month than last month, it feels like progress.
But revenue and profit are not the same thing.
Revenue is the total income your business generates from selling its products or services before costs are deducted.
Profit is what remains after the relevant costs and expenses have been taken into account.
A business can therefore have its busiest month ever without seeing the same increase in profit. If the cost of delivering that extra work has risen significantly, your margins may be getting tighter.
Why business growth can put pressure on cash flow
There is another important part of the picture: cash flow.
A growing and profitable business can still experience cash flow pressure. You might need to pay new employees, suppliers, VAT or other costs before you receive payment from your customers. You may also be investing in equipment, technology or marketing to support the next stage of growth.
This means increasing sales can sometimes put more pressure on cash in the short term.
Keeping an eye on your cash flow helps you understand not only whether the business is profitable, but whether you have enough money available to meet your commitments and continue investing in growth.
How to tell if your business growth is profitable
As your income increases, it’s worth looking more closely at where that growth is coming from and what it is costing you to deliver it.
Ask yourself:
Which products, services or areas of the business generate the most profit?
Have your costs increased at the same rate as your revenue?
Are your profit margins improving or getting tighter?
Are your prices still right for the products or services you provide?
Is some work taking significantly more time or resources than others?
Are customers paying you quickly enough?
Is your profit increasing alongside your revenue?
You don’t need to be a financial expert to start asking these questions. But you do need accurate and up-to-date financial information.
If revenue is increasing but profit isn’t, understanding why can help you decide where to focus your time and money.
The numbers a growing business should watch
You don’t need to monitor every figure in your accounts every day. However, there are a few key numbers that can give you a useful snapshot of the financial health of your business.
Gross profit is your revenue minus the direct costs associated with delivering your products or services.
Gross profit margin shows gross profit as a percentage of revenue and can be particularly useful for understanding whether increased sales are translating into profitable growth.
Net profit is what remains after the business’s operating expenses and other relevant costs have been deducted.
Net profit margin is the percentage of total revenue that remains as profit after all business expenses have been deducted.
Cash flow tracks the movement of money into and out of the business and helps you understand whether you have enough cash available to meet your financial commitments.
Good bookkeeping helps you make better decisions
Good financial information isn’t just about understanding what happened last year. It should help you decide what to do next.
Keeping your bookkeeping accurate and up to date gives you a reliable picture of your income, expenses and cash position rather than having to rely on guesswork or wait until your year-end accounts are prepared.
For growing businesses, regular management accounts can take this a step further.
They can help you understand how different parts of the business are performing, track changes in your costs and identify opportunities to improve profitability. This information gives you a clearer picture of how the business is actually performing, helping you make decisions based on the numbers.
Your next steps
Growth is exciting and increasing sales is something to celebrate. But revenue alone doesn’t tell you whether your business is becoming financially stronger.
At SJC Finance Team, we work alongside growing businesses to keep their finances organised and turn their numbers into useful information. From bookkeeping and management accounts to cash flow and forecasting, we can give you a clearer picture of how your business is performing and help you plan confidently for the next stage of growth.
Want to understand what your numbers are really telling you? Get in touch with SJC Finance Team to find out how we can help.
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