Is your business actually growing?

Hi, this is the first draft of one chapter in a book we’re working on. I’d love your feedback in the comments below. To get updates on progress enter your email below:

 

One of the reasons I believe that people aren’t able to grow their businesses is because they don’t understand what business growth is. I know, because I struggled with it for 7 years.

To understand growth you need to ask yourself, what does it look like when I’m consistently growing my profit?

There are 2 elements to this question. 1 is consistency and the other is profit. Both are important to accurately establishing growth.

Revenue vs profit

First of all let’s look at profit.

For simplicity, I’m going to use salary and profits interchangeably. Once you get to the point where you can pay yourself a wage and also have profit that’s great. But until you get there, they are effectively one and the same.

We will discuss founder’s involvement and profit margins later on, but for now this will do. We are defining profits as whatever is left in the business after expenses, before you as the founder take any for yourself.

Here is a line chart showing my previous company’s revenue in each year of business. This is estimated because I don’t have the exact records.

revenue_and_profit_640

This was the metric I paid close attention to. Its not mind blowing growth by any means but I thought I was doing ok.

I thought growing my revenue gradually meant I was growing my business.

I was wrong.

Here’s the scary truth about what was going on, with a chart that shows the revenue growth as well as the profit growth.

quarterly_profit_640

Remember “To understand growth you need to ask yourself what does it look like when I’m consistently growing my profit?”

Unfortunately I was not consistently growing my profit. In fact, I wasn’t growing my profit at all! In 7 years of business, with ongoing revenue growth, my profits remained the same.

The business did not have a decent profit margin and was therefore not growing profits as the revenue grew. I had no idea what the profit margin was, so I didn’t know ahead of time that I was moving sideways.

We will discuss profit margin in the next chapter, and way to easily estimate it at any stage of your business.

There were a lot of reasons why the business wasn’t growing and I hope to delve into those throughout this book. For now, the takeaway is to make sure you have a good way of estimating your profit margin with and without you in the business.

Consistency

So let’s say your profit is going up. Does that mean your business is growing? Not necessarily. For your business to be growing, you need some level of consistency in that growth.

My previous business did new sites for clients (one off projects), but it also did recurring services like hosting, SEO, support etc. We invoiced all recurring projects on a quarterly basis at the start of each quarter.

Here is how a typical year in my business looked.

quarterly_profit_640

The problem here is it’s very hard to tell if the business is growing. For example:

  • In quarter 2 we looked to be growing, however we just got 1 big project. 1 project does not demonstrate consistent growth so this was a red herring.
  • In quarter 4 it looks like we are shrinking, but the business was cyclical and December was it’s quietest month. So this may be normal, or it may be actually higher than it was last year.

The problem here is the business model is too complex and too inconsistent to be able to easily and quickly understand growth. If you can’t understand it, you make all sorts of bad decisions while thinking they are good ones.

Most new business owners see their revenue going up and they assume it means growth. Or they see it go down and assume it means they are going backwards. But a lot of the time, their business is just too complex to truly understand if it’s consistently growing profits or not.

To make things worse, this business model (a mix of projects and recurring services) is very common for self funded small business owners .

Having a non existent profit margin and a complex business model, where you can’t understand growth, is a toxic combination.

Growth is about consistency and profits. Just because you have a good month, or even a lot of good months where revenue goes up, it doesn’t mean your business is growing. CLICK TO TWEET THIS.

You need to understand profit margin and it helps to have a simple business model where you can easily understand month on month profit growth.

This is part of a few ideas we are working on for a book, please let me know what you think in the comments. 

About

Dan Norris is a co-founder at WP Curve and a passionate entrepreneur with an obsession for content marketing.

22 responses to “Is your business actually growing?”

  1. Ken Dowling says:

    Very clear portrayal – I too was in the revenue monitoring mode many years back. Enjoyable time but a waste of opportunity.

    Maybe, for the benefit of self-funded startups who tend to work in the biz rather than on it; explicitly say/show that the profit line needs to be monitored quarterly, if not monthly, for trend. Thus if necessary, a bail-out can be effected earlier than penury.

    If that is a full chapter then in my opinion it is perfectly sized for your audience.

  2. Dan Norris says:

    Thanks Ken I appreciate that. I have another chapter on how to estimate profit margins live as opposed to waiting till the end of the month or quarter. That one talks about how to estimate the profit with the founder in the business and out of the business.

    I think I’ll try to keep most chapters to around this sort of size.

  3. I feel like I’m reading a book about my business: once-off projects with some recurring revenue, hard to decipher if we’re succeeding or failing, etc. Thanks so much for your posts, they’re amazingly useful.

  4. This is something I struggle with Dan! Food for thought.

  5. Marc Noguera says:

    Very easy to read and understand, but I prefer more practical stuff, more examples.

  6. Jon Tucker says:

    We have a similar business model as what you described. We have recurring services, but also take on website projects that are quite large and skew the overall numbers quite a bit.

    Here’s how we overcome this from a financial review perspective:
    – we split out project-based revenue when doing periodic reports in QuickBooks. For example, we will look at revenue trends for recurring clients and revenue trends for projects separately in different reports
    – we do milestone invoices for projects. In order to know upcoming revenue for not yet completed milestones, we have a report that shows the unbilled amount of the full project estimate. By looking at this for all open projects, we can see how much revenue we have coming in from projects over the next 30 to 60 days.
    – we bill our recurring clients monthly. But each quarter we create an estimate that represents income for each month in the quarter. This enables us to know what revenue is coming up for recurring clients using the same estimate report I explained above.

    I think your explanation makes sense if you’re only looking at topline revenue. But when you segments different revenue sources, it becomes easier to see what’s happening in the business.

  7. Dan Norris says:

    Hey John, how established is your business? I’m coming up with some ideas in the book for how people can avoid using out of date reports in accounting systems like Quickbooks. I think if you don’t know what is going on with your business right now, then it becomes very hard to know if you are really growing.

    I still think the business model itself makes it very difficult to know if your business is really growing.

  8. Dan Norris says:

    Thanks Marc, would you want example from my own experience or from other companies?

  9. Dan Norris says:

    Thanks Melissa, that’s no good you struggle with it but it also tells me that maybe there will be some useful stuff in the book for you.

  10. Dan Norris says:

    Thanks Miriam, I’m glad you find it useful. I’m trying to put together something that I would have liked to have 5 years ago.

  11. Jon Tucker says:

    Been doing it since 2005, but in its current form for about three years.

    I agree QuickBooks and these types of reports can be a hassle. But it has given us the insight past the challenges that you mentioned above.

    The job based versus recurring revenue is so different that I don’t think it makes sense to monitor them all in the same report. It makes it too difficult to draw conclusions from the data.

  12. Dan Norris says:

    So you are able to know that parts of your business are growing – i.e. the recurring component. But how to work out whether the rest is growing and whether the work you are doing today is helping it grow I imagine would still be a challenge?

  13. Jake Jorgovan says:

    Great article Dan. As you have said before, revenue is the ultimate vanity metric.

    You just described the exact struggles I had with my first business. Growing revenues isn’t hard, growing profits is. When you grow your revenues, it is far too often that you just end up with more risk, more stress and more problems.

    Right now, I am running a small web design agency doing less than a tenth of the revenues my video production company once did, yet I am pulling in more personal income than ever before.

    Sales doesn’t always fix everything…

  14. Dan Norris says:

    Hey Jake I’d love to share some of the other content with you. I specifically deal with how to estimate profits with and without the founder involved in the business. I’ll post something in Content Club about it.

    Thanks for your comment.

  15. Marc Noguera says:

    I ill prefer your experience examples, typical examples and also exceptions.

  16. Jon Tucker says:

    That’s a good point – I think it comes down to this type of business model not having the more linear revenue growth as a SaaS model. Clients are a bit too different and we’re on a low volume high dollar model, rather than a high volume low dollar model.

    Hard to describe in a comment, but hopefully this makes sense.

    In short:
    – we track recurring revenue and project revenue booked for the month, separately
    – we track upcoming recurring revenue and project revenue for the next 30-60 days, separately
    – we know appx what % of project based clients will turn into recurring clients, though that varies and is probably where the difference is vs the predictability of a SaaS model
    – we have a few specific marketing efforts that seem to produce ongoing results – James Schramko’s own the racecourse type of stuff, though we’re working on more direct lead-hen type of campaigns right now to get those more predictable.

    Keep up the good work! Love reading your content.

  17. Jeff Jones says:

    Hey Dan,

    As somebody who has both one off and passive income, it can be a tough spot to figure if you’re moving forward or sideways. I’ll enjoy hearing more of the examples from your business for sure!

    Jeff

  18. Andy Josuweit says:

    Dan – An awesome and eye-opening book for me was “Profit First”… The entire book turns the traditional GAAP accounting model on its head to Revenues – Profit = Expenses.

    Funny story.. I literally found the book atop a garbage can at the airport. Now our entire business runs on the strategies provided.

    Give it a look here: http://www.amazon.com/Profit-First-Transform-Cash-Eating-Money-Making/dp/0981808298

  19. Dan Norris says:

    Ha awesome thanks Andy.

  20. James Banks says:

    You’ve nailed my exact position Dan to a fine point. Thank you for making all of this excellent honest information visible to the public. You may have just save me years of frustration with your articles. Thank you!

  21. Dan Norris says:

    No worries man, glad it’s useful.

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