Growth can make a bad business worse

Every business wants to grow.

More customers, more sales, more employees, and more locations all feel like signs that the business is moving in the right direction. Growth creates excitement, attracts attention, and gives everyone something clear to work toward.

But growth is not always good news.

If the business makes money each time it sells something, growth can create enormous value. If the business loses money each time it sells something, growth simply creates more losses.

This sounds obvious when written down. In practice, it is one of the most common mistakes I have seen businesses make.

Revenue is visible.

You can see new contracts being signed, orders coming in, and customers joining. The sales team has a clear target, employees can feel the increased activity, and the company appears to be gaining momentum.

Profit is much harder to see.

To understand whether that new work is actually valuable, you need to know what it costs to deliver. That includes the obvious costs, such as materials and employee hours, but also the less visible costs of managing the customer, correcting mistakes, handling revisions, providing support, and collecting payment.

A customer may generate $100,000 in revenue and still create very little profit. In some cases, the business may actually lose money serving them. But because the revenue is real and the team is busy, the company continues to treat that growth as success.

A growing business can look healthy even when the numbers underneath it are getting worse.

New sales bring money into the company, which helps cover existing costs. The business then hires more people, adds new systems, and takes on more overhead to support the additional work. As long as revenue continues to increase, the problems can remain hidden.

Then growth slows.

The business is left with higher costs, more complexity, and work that never produced enough profit to support the organization built around it.

I saw versions of this repeatedly during my time in consulting. Even large companies with experienced leaders struggle to balance growth and profitability. The pressure to hit a revenue target can cause a business to pursue customers, products, or markets before understanding whether the work actually makes money.

Small businesses are even more exposed because they usually have less cash available to absorb mistakes. A large company may be able to fund an unprofitable expansion for several years. Most small businesses do not have that luxury.

When profit starts to fall, the natural response is to increase sales.

The thinking is understandable. If the business can bring in more revenue, there will be more money available to cover its costs. Sometimes that is true. A business with healthy margins but high fixed costs may genuinely need more volume.

But if prices are too low, jobs consistently run over budget, or customers require more support than expected, selling more does not solve the problem. It multiplies it. Imagine that a company loses $50 on every job it completes.

At 100 jobs, it loses $5,000. At 1,000 jobs, it loses $50,000.

The business has grown tenfold, but it has not become any stronger. It is simply moving toward the same problem much faster. This is why revenue growth alone does not tell you whether a business is improving.

The answer is not to stop growing or wait until every part of the business is perfect.

A company may choose to hire ahead of demand, enter a new market, or accept lower profits for a period of time. That can be a sensible decision when it is planned and the company can afford it.

There is an important difference between a business that is temporarily unprofitable because it is deliberately investing in growth and one that loses money every time it makes a sale.

The first may have a sensible plan. The second has a problem that growth will only make larger. The important question is whether the basic work makes money.. Before accelerating growth, the business should understand:

Once that picture is clear, the sequence becomes much simpler:

Growth means the business is getting bigger. Healthy growth means the business has found something that works and can repeat it without its costs and problems increasing just as quickly.

Many owners think of profitability as a financial issue. In reality, much of it comes down to how the business operates each day.

Profit improves when the business can deliver the same product or service with fewer wasted hours, fewer mistakes, less rework, better purchasing, and clearer processes. It also improves when the business charges appropriately for the value and effort involved.

That leaves two basic ways to improve:

Neither automatically requires cutting employees or lowering quality. Often, the best opportunities come from removing work that should never have existed in the first place. A missing checklist creates rework. Poorly defined scope creates free work. Weak planning creates overtime and rush charges. Unclear ownership creates delays.

Fixing those problems makes the business more profitable and easier to grow.

Review your last five jobs or sales. For each one, compare:

Identify the least profitable one and decide what must change before you sell it again: the price, the scope, the process, or whether you should offer it at all.

Before you grow the business, make sure you are growing work that actually makes money.

Until next time …

One practical way to improve your business each week