The year my revenue went up and my profit went down

The year my revenue went up and my profit went down

I’m going to tell you about a year in my own business, because I don’t think there’s a better way to explain what I mean when I say growth can cost you money.

For nine and a half years, from 2013 to 2022, I owned a retail gifting business. A physical shop, and an online side to go with it. It’s closed now. I set it up partly as a personal challenge alongside everything else I was doing, but it was a real business with real customers, real stock and a real bottom line, and it taught me things that a long career leading operational improvement in much larger organisations hadn’t.

2018: the best year we’d had

A couple of years before, I’d moved the business from a small premises to a much larger one. I paid for that myself, and it was a risk, but we were profitable when we moved.

2018 was our first full year in the new shop and it was the best year the business had ever done. Throughput was good. We made some money, and there was aprofit at the end of it that I was able to put back into the rest of the business. If you’d asked me at the end of 2018 whether the move had worked, I’d have said yes without thinking about it.

2019: more of everything, except profit

So in 2019 we went for it. Real energy, real effort, really driving the thing. The website in particular. We put a lot more into online: a new site, advertising, affiliate sales, offers on delivery, discounts to win the order. And it worked, in the sense that everyone means when they say it worked. Revenue went up.

But the revenue went up on the wrong side of the business. It grew online, where the margin was smaller to begin with, and every pound of that growth brought costs with it that the shop floor didn’t have. Delivery. Discounts to win the business. Affiliate commission on sales that came through other people’s sites. The ads that drove the traffic. The maintenance on the new website I’d bought. Each of those was a reasonable decision on its own. Together, they used up the profit the growth should have brought.

Whilst my revenue was bigger, my ultimate profit was lower, because I was giving stuff away to win that revenue. I was putting it through channels that were not optimised at a profit level, and the cost of driving that online business meant the profit did not grow. It went down.

Why I saw it, and why a lot of owners don’t

I knew fairly quickly, because I tracked profit monthly. You’d probably expect that of someone with my background. It still took about six months for the picture to become clear, and it became unarguable in 2020, when the shop had to close its doors for a period due to COVID and we were trading fully online, and I could see the margin gap between the two sides of the business with nothing to hide it.

What I’d ask you to take from that is this. I was watching monthly and it still took half a year. A lot of owners aren’t watching monthly. They watch revenue weekly, because revenue is the number that’s easy to see and feels like progress, and they find out about profit once a year when the accounts are done. For them, this doesn’t take six months to notice. It takes about two years. Year one, the profit’s flat and you think: well, we invested, we’ll see it next year. Year two, it’s flat again, and it’s usually the accountant who says so.

“I am working my arse off, and revenues are growing. We’re just not making any more money at the end of the year, and I don’t really get it.”

That’s how owners put it to me, and I said a version of it myself in 2019. The only difference between us was when we found out.

What was actually going on

It wasn’t that I’d stopped working hard. 2019 was the hardest I worked in that business. It wasn’t that the team had got worse, or the product, or the customers. It was that the growth had been bought, and the costs of buying it had landed in different lines of the accounts from the revenue it produced. Ads in one place. Delivery in another. Commission in a third. Revenue in a fourth. Nothing I looked at week to week connected them, so nothing told me, until the profit line did.

That’s the structural point, and it isn’t personal to retail or to me. Any business can grow through a channel, a type of customer or a kind of work that costs more to win and more to serve than what it had before. If you’re only measuring the revenue, it looks like success right up until the accounts arrive.

One thing to do this week

I’d do what I eventually did, and do it sooner than I did.

Take last month and the same month a year ago. Put the revenue side by side, split by wherever it comes from in your business: channel, customer type, kind of job, whatever the natural split is. Then put the costs side by side the same way. Look for where the costs went up in the same place the revenue went up, and ask whether the extra revenue paid for the extra cost with something left.

For me, the answer would have been plain in about twenty minutes. Online revenue up, online costs up alongside it, and by more than the extra revenue covered. I didn’t do those sums early enough because I was busy driving the revenue, which is exactly what business owners are told to do.

Do the sums. Then decide whether to keep buying that revenue.

If any of this is familiar

Follow me on any of my social sites or on LinkedIn. I write about the operational side of profit, and a fair amount of it comes from lessons I paid for myself.

And if you’d like to find out where the growth is going in your business, head over to my website and take my Profit Check: five questions which will show you how much of what your growth is costing you can’t see until the accounts land, and the first thing worth changing.

Profit Check - https://pauljarman.coach/margin

Alternatively, book a Clarity Call with me. It’s free, it takes twenty to thirty minutes, and we’ll put your last two years side by side and find out what your growth has been costing you. It’s a diagnosis, not a sales call.

Book a Clarity Call - https://pauljarman.coach/book-a-call-profit