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.

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