Twice the Turnover, the Same Money. Where the Margin Goes

The Short Version: Turnover can rise by half while profit doesn't move. The margin is decided when the job is priced and lost while it is delivered, and in many owner-run businesses only the owner really knows how to price. So every extra job is another chance for margin to slip past him. Before chasing more sales, fix who prices, who checks, and what happens when nobody is looking.

What this post covers:

• Why a bigger business so often makes the same money
• The two places margin is lost: the quote and the delivery
• Why growth multiplies the leak instead of fixing it
• How to get pricing out of your head without losing control of it
• What thin, owner-held margin does to what your business is worth

I sat with a contractor a couple of weeks ago who said something I've heard in different words from a lot of owners. Turnover had gone up by more than half over a few years. Bigger jobs, more people, more sites. And they didn't make any more money.

He wasn't complaining about the market. He was clear it was on him. Jumping in feet first, a bit of contractual naivety, jobs taken on before they'd really been thought through. What he wants now isn't more turnover. He told me he could turn over a lot more tomorrow if he wanted, at poor margins. What he wants is to be slicker at the size he already is, and to roughly double his net margin.

His question for the next year is a simple one. Where is the money leaking out the door?

That question is what this piece is about.

Bigger Every Year, No Richer

Here's the pattern. The business grows. The owner works harder. The bank balance doesn't reflect either.

It isn't only small firms. Sara Davies MBE told the ActionCOACH UK podcast that, by her own account, there was a point when Crafter's Companion was turning over around £10m and making about £1m a year. She put everything into growth. A few years later it was turning over more than £30m, and in her words still making about a million. Three times the turnover. Three times the problems. The same profit. Looking back, she puts a lot of that down to ego, and she now wants a sustainable, well-run business rather than the biggest one.

The contractor and the craft brand have almost nothing in common, except the shape of the graph. Turnover up, profit flat.

Many owners read that graph as a sales problem or a market problem. It rarely is. In nearly every case I look at, the margin was decided in one place and lost in another, and the owner was the only person standing between the two.

The bottom line: if profit hasn't grown with turnover, more turnover won't fix it. Find where the margin goes first.

The Margin Is Decided Before the Job Starts

My very first job out of school was with a big M&E contractor. They had a whole team of estimators, and back then the estimators would put bids in below cost. Deliberately. They knew they would win it all back on variations.

The most profitable job they ever had was a research site that was about ninety percent complete when animal rights protesters broke in and wrecked it. Everything had to be stripped out and redone. The variations made them millions.

Nobody plans a business on that. But it taught me early that the price you quote is a decision about margin, not just a number to win the work. And in a lot of businesses I see now, that decision lives in one head.

A sheet metal owner I work with still does the difficult quotes himself. He explained why. If nobody checks whether a part can actually be bent, you can end up paying around £600 for heat treatment on two brackets you've charged at £50 each. Two brackets that cost you £700 to make. He knows which parts can and can't be bent because he has been making them for twenty years. His team doesn't, yet. So every new drawing comes back to him.

Another owner told me many of his quotes come down to gut feel, because more than half his jobs include something bought in with no set mark up. His team couldn't price consistently because there was nothing to price against. So we sat down and wrote a simple formula: count it, measure it, add a fixed cost per item, add an uplift for anything unusual. The answer it gave was almost always close to his gut figure.

That's the point. His gut wasn't wrong. It just wasn't transferable.

The bottom line: if only you can price the work, every quote that doesn't cross your desk is a guess.

And Then It Leaks Out in Delivery

The second place margin goes is after the job is won.

The sheet metal owner I mentioned checks it the only way he can, by looking back. A job quoted at four hours to fold ten parts took eight. His reaction was the one many owners will recognise: that was a bad quote. Then he goes back through the job to find out what actually happened. Every one of those checks sits with him, after the money has already gone.

Another owner was away for a few days. While he was gone, the team needed some extra kit for a job the client had asked for. They hired it in for three days on a two day job, paid about £1,000 for it, and never put it on the quote or charged the client. Nobody did anything dishonest. There just wasn't a rule for it, because the rule had always been him.

When I asked who else could have caught it, his answer was honest. The reason his team can't do it is the same reason he feels he has to do everything.

And sometimes the numbers are sitting there and nobody is reading them. A small agency owner told me his timesheets suggested about 80% gross margin per client. His accounts said 28% for the year, down from 35%. I asked him why, with the data right there, he wasn't looking at it. He said he probably wasn't sure what he'd do with the answer.

The bottom line: margin isn't lost in one big mistake. It goes a few hundred pounds at a time, in decisions nobody was told how to make.

Why Growth Makes It Worse, Not Better

When the business is small, the owner sees everything. He prices every job, walks every site, signs every order. Margin holds because he is holding it.

Then it grows. The contractor I mentioned described exactly what happened to his. In the early days everyone was part of the family and pitched in, and that was fine at around £5m. At around £25m nobody owned a job from start to finish. Good people with the right intentions, floating between things. Gaps everywhere, and money flying out the door. He spent two or three days a week just managing cash.

He also told me what happens to the numbers. A job gets reported at 20% gross profit. The reality, once overheads that should sit on the project are counted, is probably nearer 14%. And when the forecast for next year has a hole in it, there is always a big job at a thin margin that would fill it. He knows his pricing is good. In his words, it's about him holding his nerve.

Alastair Donnelly and Simon King built Inside Travel Group to about £50m turnover and 200 staff by 2019. On the ActionCOACH UK podcast they described sitting together at the end of that year and saying, this is out of control. Their budget showed they wouldn't make a profit the following year if they carried on. Overheads were growing faster than turnover, and the two of them were still holding all the strings at the top, with people in the middle waiting to be told what to do.

That's the mechanism. Growth adds jobs, people and decisions faster than one person can check them. If pricing and cost control still depend on the owner, each new job is another place for margin to slip.

The bottom line: growth doesn't fix a margin problem. It multiplies it, at whatever rate the owner can't keep up with.

Getting the Price Out of Your Head

I'll own this one, because I did it myself.

When I started my first team in sales, I built it from scratch. I knew the pricing. I knew the discount levels. I knew how to do all of it. Then I recruited someone, and when he asked for help with a quote, I said let me just do it. Then the second person, and I was still helping the first. Then the third. Then the fourth. It wasn't scalable, because nobody was learning how to do it. I was.

What fixed it wasn't me working harder. They learned to do their own quotes and brought them to me for approval. Then they stopped bringing them unless the discount went past a set level. And below a certain margin, even I couldn't approve it. That went to the CEO.

Two numbers. One that said check with me, one that said nobody here can sign this. Everything inside those lines, they decided.

John Hutmacher described the same thing on the ActionCOACH UK podcast, at a much bigger scale. Somewhere around $20m to $30m, every pricing and purchasing decision in his business was still coming to his desk, and he realised the business would only ever grow as far as he could. So he stopped answering. He asked what would you do, wrote the answers down department by department, and when a manager rang him, he asked whether it could wait for their weekly one to one.

None of this means taking your hands off. It means writing down how you price, setting the limits you care about, and checking the exceptions instead of every quote. It also helps to remember what the customer actually wants. When I'm in a Greek restaurant, I don't want to know the aubergine cost forty pence and the bechamel a pound. All I want is the price for the moussaka. Your quote can be built from a detailed cost sheet without the client ever seeing it.

The bottom line: you don't need to price every job. You need to decide the rules every price has to meet, and only see the ones that break them.

What a Buyer Sees

Even if you never sell, this is worth looking at through a buyer's eyes, because it's the clearest test there is.

Dan Leaman, a corporate finance partner at Moore Kingston Smith, told the ActionCOACH UK podcast that a buyer is buying the future cash flows of the business. Price driven, tendered work counts as lower quality income, because anyone could win the next job. A single digit margin usually says a business is being squeezed on price. And he puts reliance on the owner alongside, or even above, reliance on one big customer.

Spencer Gallagher, who sold his own agency and now advises on agency sales, uses three 20s as a rough guide: growing at about 20% a year, making about 20% profit, and no client worth more than 20% of revenue. The first question buyers ask him is whether the team and the clients will still be there when the founder isn't.

Put those together. A business that has doubled its turnover on thin margins, where only the owner can price the work and only the owner catches the mistakes, is worth less than its turnover suggests. Sometimes a lot less.

I wrote earlier this year about why so many Hertfordshire businesses stall around £2m, and the argument here is the same one. The ceiling is structural, not a sales problem. So is the margin.

The bottom line: a business only you can price is a business a buyer has to discount.

Frequently Asked Questions

Why is our turnover up but our profit flat? Usually because margin is being lost between the quote and the finished job, and growth has added more jobs than anyone can check. Look at sold margin against delivered margin on your last ten jobs before you look at sales.

Where do businesses typically lose margin? In three places: quotes priced on gut feel with no standard to check against, costs in delivery that never make it back onto the invoice, and overheads that aren't allocated to jobs, so reported margin looks better than it is.

Who should price jobs in a growing business? The people closest to the work, against written rules you have set: a standard way to build a price, a discount level that needs your approval, and a margin floor nobody can go below without a second signature.

What gross margin should a contractor aim for? It depends on the trade and the work, but the more useful question is the gap between the margin you sell at and the margin you deliver. If that gap is more than a few points, fix it before chasing new work.

How does margin affect what my business is worth? Buyers value future profit, so thin or unpredictable margins lower the value directly. If the margin also depends on you personally checking the numbers, a buyer will see that as risk and price it in.

Key Takeaways

• Turnover going up while profit stays flat is rarely a sales problem
• Margin is decided at the quote and lost in delivery, a few hundred pounds at a time
• If only the owner can price, every quote he doesn't see is a guess
• Growth multiplies a margin leak, it doesn't fix it
• Write the pricing rules down, set the limits, and check only the exceptions
• A business only you can price is worth less to a buyer

Have a look at your last ten finished jobs. What did you sell them at, and what did you actually make? If you don't know, or you're the only one who could find out, that's the place to start.

The Leadership Compass takes about three minutes and shows where your business still depends on you most.

And if you'd like to talk through where your margin is going, I'm always happy to have that conversation.