Not All Revenue Dollars Are Earned Equally

Your revenue can be growing while your business is getting worse.

That's not as unusual as it sounds.

An owner tells me revenue went from $2 million to $3 million.

Great.

Then they tell me they're working harder than ever, constantly short on cash, have more employees, more management headaches, and somehow don't feel like they're making any more money.

That's when the $3 million stops impressing me.

Because not all revenue dollars are earned equally.

Before celebrating the growth—or deciding it's the problem—I want to know what it took to produce it.

First, is this actually a cash problem?

If the owner tells me they're always short on cash, I want to separate two things that often get lumped together:

Are you making money and having trouble converting it into cash?

Or:

Are you simply not making enough money?

Those are very different problems.

I'd start with the obvious cash-flow drivers.

How quickly are you billing?

How quickly are customers paying?

What's happening with accounts receivable?

Has growth created a larger working-capital requirement?

Are there significant debt payments, equipment purchases, owner distributions or other uses of cash?

Maybe the company is profitable and the cash is simply tied up somewhere.

Fine. Now we know where to look.

But if cash timing doesn't explain it, I'm going back to profitability.

And that's where revenue starts getting interesting.

Show me how you earned the $3 million

Revenue by itself doesn't tell me enough.

I want to know what kind of revenue it is.

If your accounting allows it, break the business into something meaningful.

Service lines.

Departments.

Customer types.

Project types.

Locations.

Whatever actually reflects how your business operates.

Then look at the margins.

Because going from $2 million to $3 million doesn't necessarily mean you added $1 million of equally valuable business.

Maybe one part of the company performs beautifully.

Another looks busy but barely contributes anything after the cost of delivering the work.

Now we have somewhere to investigate.

If the margin is wrong, don't immediately raise the price

Pricing may absolutely be the problem.

But again, I'm not prescribing yet.

I want to understand why the margin is wrong.

Let's say labor cost is much higher than expected on one of your most common types of work.

I'd pull a few representative jobs and look at what actually happened.

Did the work take longer than expected?

Why?

Were the people doing it inefficiently?

Was scheduling poor?

Was there unnecessary management involvement?

Are responsibilities unclear?

Are multiple people doing overlapping work?

Did the estimate simply assume fewer labor hours than reality requires?

If the operation is inefficient, raising the price may just hide the inefficiency.

On the other hand, maybe the team is performing exactly as well as it reasonably can.

Then I'd start looking much harder at pricing.

And sometimes the pricing math was wrong from the beginning

I've seen businesses price work without a clear understanding of what the work actually costs them.

Labor is an easy example.

Someone makes $30 an hour, so the owner puts $30 an hour into the calculation.

But that employee doesn't actually cost the company $30 an hour.

There are payroll taxes.

Benefits.

Workers' compensation.

Other labor burden.

And depending on the business and how you're evaluating the work, there may be supervision and other costs necessary to deliver it.

Leave enough of those things out and the math can look perfectly reasonable while the actual result consistently disappoints you.

I've also seen owners use different logic depending on the job.

One gets priced using estimated labor.

Another gets priced based on what a similar project sold for.

Another gets some quick math.

Another is based largely on instinct.

Quick math isn't necessarily bad.

But inconsistent starting assumptions create inconsistent outcomes.

At some point you need to compare what you thought you were going to make with what you actually made.

The financial statements are useful here because they tell me where to start looking.

They don't necessarily tell me what to fix.

But let's say the margins are actually good

Now this becomes a different conversation.

You're profitable.

The cash issue is manageable.

Yet the company still feels considerably harder to run at $3 million than it did at $2 million.

Now I'm probably leaving the financial statements for a while.

I want to know what happened to the business while the revenue was growing.

How did you build the organization?

And one answer makes me particularly curious:

"Whenever we got overwhelmed, we hired someone."

That's understandable.

You need office help, so you hire someone.

Sales gets busy, so you add a salesperson.

Operations becomes overwhelming, so you add a manager.

Each decision might make perfect sense individually.

But eventually you can end up with a collection of hiring decisions instead of an intentionally designed company.

Adding people isn't the same as building infrastructure

This is where I'd want to understand the organization the growth created.

Who owns what?

Are the roles actually clear?

Do you have people doing overlapping work?

Are managers accountable for clear outcomes?

Did you hire people into well-defined roles, or did you hire good people and gradually hand them whatever needed doing?

Sometimes the answer isn't firing anyone.

You may have good people.

You may simply be getting less out of them than you should because the organization around them is unclear.

If that's what I find, I'd probably put the SOPs aside too.

First, sketch the accountability structure the business actually needs at its current size.

Then put the people you already have against it.

Where do they fit?

Where don't they?

Where do responsibilities overlap?

What's missing?

Only after I understand the people structure would I start going deeper into process and technology.

Because automating a messy process doesn't necessarily make it better.

Sometimes it just helps you perform the wrong process faster.

Then there's another question: Is this even the revenue you want?

Let's say we identify $600,000 of business from one particular type of customer.

It's profitable.

The owner likes the work.

So should they keep it?

Maybe.

But now I'm going to ask a different question:

What kind of company do you have to build to produce a lot more of it?

If this becomes 50% or 60% of your business, what does that company look like?

Do you need another team?

More management?

Different equipment?

Different expertise?

Different systems?

More working capital?

Are you comfortable replicating that operating model over and over again?

And perhaps most importantly:

Is that the company you actually want to own?

Because when you choose revenue, you're often choosing the business that comes attached to it.

That's something I don't think owners consider enough.

You are allowed to say no to good revenue

Not recklessly.

And certainly not without considering contractual obligations, customer commitments, employees and the financial impact.

But profitable revenue isn't automatically strategic revenue.

I've had to make versions of this decision in my own business.

As the business evolved, some clients that once made sense no longer fit the kind of company I wanted to build.

That didn't mean they were bad clients.

And it didn't mean I needed to drop them tomorrow.

It meant I needed a transition plan.

Stop adding more of the work you don't want.

Start deliberately pursuing more of what you do want.

Build enough of the new revenue that you can responsibly begin transitioning away from the old.

Give customers appropriate notice.

Help create alternatives where it makes sense.

You don't have to blow up $600,000 of revenue on Monday because you suddenly discovered it isn't your ideal business.

You can change the mix deliberately.

So where would I start?

If your revenue is growing but the business feels worse, I wouldn't start by cutting people.

I wouldn't start by raising prices.

And I wouldn't assume growth itself is the problem.

I'd diagnose in layers.

First: Cash.

Is the business profitable but cash is getting trapped somewhere?

Or is the cash problem simply the symptom of weak profitability?

Second: Revenue quality.

What are you actually selling?

To whom?

At what margin?

And does that work fit the company you're trying to build?

Third: Cost.

If margins aren't where they should be, where is the leakage?

Labor?

Materials?

Pricing?

Execution?

Management?

Something else?

Fourth: Infrastructure.

If the economics work but the company still feels harder than it should, look at what you built around the growth.

People.

Roles.

Accountability.

Process.

Technology.

Don't change all four at once.

Find where the problem actually starts.

Revenue isn't the score

Revenue matters.

Growth matters.

But neither tells you whether you're building a better business.

I'd rather see a company deliberately produce $2.7 million of the right revenue than chase $3 million simply because $3 million sounds better.

The better question isn't:

"How much did we grow?"

It's:

"What did this growth give us—and what did it cost us to get it?"

Because not all revenue dollars are earned equally.

Tiffany K. Founder, Advisor For Hire