Profitability is not keeping up with growth

That sounds obvious. But while a company is growing fast, the difference is very easy to miss. Revenue growth can cover a lot of inefficiency for a while. One more employee, a slightly larger discount to a customer, a new product that brings turnover but not margin, more expensive logistics, a process that used to be good enough and no longer is.

Individually, none of those may be a problem. Added together, they become one. The company is bigger, but not necessarily more profitable.

A company with 3 million euros of revenue is not the same company once it reaches 10 or 20 million. It has more people, more customers, more products — and far more decisions, meetings and coordination. Which means a great many things that have simply stayed in the system over time.

That is where the problem starts. A process that worked well while the company was small need not work well once it grows. Organisations often do not grow to a plan; they get extended. One more person, one more function, one more report … And after a while everyone is working hard, but the company is not producing proportionally more value.

Productivity does not mean people should work more. Very often they already work too much. The question is how much value comes out of the time, the people and the capital the company uses.

If revenue rises 20% and that growth needs 25% more people, more administration, more meetings and more operational work, the company has indeed grown. But it has not become more productive. In the long run that has to hurt the margin.

Strong growth can hide falling productivity for quite a long time.

Usually not in one place. Sales may be doing good volume on a worse mix. A customer may look large by revenue but, after discounts, logistics and all the extra demands, no longer be particularly profitable. The portfolio may hold too many products. The organisation may have become too expensive. People may spend too much time on internal processes that create no value for the customer. Prices may simply not have kept up with rising costs. A lot of maybes … And one key maybe is missing: maybe what the company actually lacks is the investment in automation, digitalisation or better process organisation that would raise productivity.

So the problem is not necessarily “costs are too high”. The question worth asking is: why are costs growing faster than the value the company creates? That is not the same question. Nor is it the same problem.

Even if it is the most common one. Of course there are costs that should come down. There always are. But cutting costs across the board without understanding the cause can do exactly the opposite of what was intended.

The result can be fewer people where people create value, a halted investment that would have raised productivity, or less marketing that generates profitable growth. While the processes causing the greatest inefficiency are left untouched. The question is not whether costs should be controlled. Of course they should. The real challenge is working out precisely what to cut, what to change, and what to invest more in.

Only then does the real picture usually start to appear. Sometimes the problem is in sales, sometimes in costs, sometimes in the organisation. And very often in a combination of all of them.

Revenue shows how big a company is. Profitability and productivity show far better how good it is.