Not All Revenue Is Good Revenue

Insights from the coaching room

Revenue has a reassuring quality about it.

It's easy to understand.

Easy to celebrate.

And when it's going up, it feels like the business must be doing well.

A £100,000 order lands.

A major new customer signs.

The pipeline grows.

Turnover reaches a record high.

All good news.

Except sometimes it isn't.

Because one of the things I've learned from working with growing businesses is that not all revenue is equal.

Some revenue creates profit.

Some creates cash.

Some leads to repeat business.

Some introduces you to better customers.

Some helps build a stronger, more valuable business.

And some revenue does little more than make everybody extremely busy.

Understanding the difference can fundamentally change how you grow a business.

The Question Behind the Revenue

If a business owner tells me:

“We've won a £250,000 contract.”

My instinct isn't simply to ask:

“How do we win another one?”

I'd want to understand the revenue we've just won.

What margin will it produce?

How much management time will it consume?

What working capital will it require?

When will we actually get paid?

What capacity will it take?

What risks come with it?

What other work might we have to turn away?

And, importantly:

Would we want another ten customers exactly like this one?

That last question can be surprisingly revealing.

Because sometimes the answer is:

“Absolutely.”

And sometimes it's:

“Good God, no.”

If it's the latter, we probably need to look beyond the turnover figure.

Turnover Can Hide a Lot

Two businesses can each have £5 million of revenue and be completely different businesses.

One might have:

• healthy margins
• strong recurring revenue
• loyal customers
• predictable cash flow
• sensible payment terms
• good systems
• manageable delivery
• limited customer concentration

The other might have:

• thin margins
• one-off projects
• slow-paying customers
• constant firefighting
• heavy working-capital requirements
• a few customers representing most of its income
• an exhausted management team

Same turnover.

Very different businesses.

Which is why turnover on its own tells us remarkably little about the quality of the business being built.

The Customer Everyone Celebrates

Large customers are particularly interesting.

Winning a major account can feel like a breakthrough.

And sometimes it is.

But large customers can also create problems that aren't immediately obvious.

They may demand:

• lower prices
• longer payment terms
• bespoke reporting
• special processes
• dedicated account management
• stockholding
• preferential treatment
• faster response times
• exceptions to your normal way of working

Individually, each request may appear reasonable.

But gradually the business begins adapting itself around one customer.

Revenue rises.

Complexity rises with it.

Margins may fall.

And dependence increases.

Then one day somebody realises that 30% or 40% of the business relies on a customer who has enormous negotiating power.

That's not necessarily a bad customer.

But it is a risk that the headline revenue number doesn't show you.

Revenue Without Margin

This is perhaps the most obvious distinction.

A sale isn't valuable simply because it's large.

What's left matters.

I've seen businesses where some of the work everybody is most excited about is actually amongst the least attractive once the real cost of delivery is understood.

Extra labour.

Overtime.

Rework.

Travel.

Materials.

Subcontractors.

Project management.

Discounts.

Warranty issues.

Senior management involvement.

All of those things consume margin.

And because some of those costs aren't always allocated clearly to individual jobs or customers, the business can spend years believing that a particular type of work is highly valuable when it isn't.

Being busy delivering revenue isn't the same as being profitable.

Revenue Without Cash

Then there's cash.

A profitable sale can still create pressure if you have to fund the work long before the customer pays you.

Imagine winning a large project.

You need to buy materials.

Pay employees.

Use subcontractors.

Perhaps hire equipment.

All before receiving the customer's money 30, 60 or even 90 days later.

On paper, the business is growing.

At the bank, things can feel rather different.

This is one reason growing businesses can experience serious cash pressure.

Growth consumes cash.

And the faster the growth, the more important it becomes to understand how each type of revenue affects working capital.

The question isn't simply:

“How much are we selling?”

It's also:

“How is this growth being funded?”

Revenue Can Consume Capacity

Every business has finite capacity.

People.

Machines.

Vehicles.

Management attention.

Production hours.

Warehouse space.

Installation teams.

Whatever the constraint is, there is only so much of it available.

So accepting one piece of work can mean being unable to accept another.

This is where opportunity cost becomes important.

Suppose a low-margin customer fills 20% of your available production capacity.

They pay reliably.

They're pleasant to deal with.

Nothing is particularly wrong.

But what if that capacity could instead be used for work producing twice the margin?

Suddenly the decision looks different.

The question is no longer:

“Is this customer profitable?”

It becomes:

“Is this the best use of our limited capacity?”

That's a much more strategic question.

The Customers Who Cost More Than They Appear To

Not every cost appears in the accounts under that customer's name.

Some customers create a disproportionate amount of noise.

Constant calls.

Urgent requests.

Last-minute changes.

Repeated queries.

Extra meetings.

Special exceptions.

Senior people dragged into routine issues.

None of those may appear on the invoice.

But somebody is paying for them.

Usually you.

There is a point at which a seemingly profitable customer can become commercially unattractive because of the management capacity they consume.

This doesn't mean difficult customers should automatically be fired.

It means cost-to-serve matters.

And many businesses don't really know it.

Repeatable Revenue Is Different

Now consider another customer.

Perhaps their initial order isn't enormous.

But they buy regularly.

They pay on time.

They value what you do.

They don't demand endless exceptions.

They're straightforward to serve.

They recommend you.

Over five years, that customer may be considerably more valuable than the impressive one-off contract everyone celebrated.

This is why I encourage business owners to look beyond the first sale.

Ask:

How often do customers buy from us?

How long do they stay?

What else could we genuinely help them with?

Which customers introduce us to others?

The value of a customer isn't always visible on their first invoice.

Some Revenue Makes the Business Better

There's another dimension I think is often overlooked.

Certain customers actually help you build a better business.

They may push you into a new market you deliberately want to enter.

They may provide recurring revenue that makes forecasting easier.

They may enhance your credibility.

They may allow you to develop capability you can subsequently sell elsewhere.

They may fit perfectly with the systems you've built.

They may be exactly the type of customer your team enjoys serving.

That's strategically valuable revenue.

Contrast that with revenue requiring a completely bespoke service that you'll probably never sell again.

Both count towards turnover.

Only one may help build the business you're trying to create.

Be Careful With “We've Always Done It”

Businesses accumulate customers in much the same way they accumulate processes.

Gradually.

A customer that made perfect sense five years ago may not make sense today.

Perhaps you've grown.

Your costs have changed.

Your proposition has changed.

Your capacity is more valuable.

Your strategic direction is different.

Yet the customer remains.

Often on pricing agreed years ago.

Nobody deliberately decides to keep them.

They simply continue.

That's why customer profitability and customer fit need reviewing periodically.

Not because you should constantly replace customers.

But because the business you're building today may require a different customer mix from the business you were building five years ago.

Who Is Your Ideal Customer — Commercially?

Many businesses have an ideal customer profile based on fairly broad characteristics.

Sector.

Location.

Business size.

Type of work.

Useful.

But I'd take it further.

What does an ideal customer look like commercially?

Perhaps they:

• value quality rather than simply choosing the lowest price
• generate an appropriate gross margin
• pay within agreed terms
• buy repeatedly
• fit your operational model
• require limited bespoke work
• have further growth potential
• recommend you to similar businesses
• are enjoyable for your team to work with

Now we have something more useful than:

“Anyone who needs what we sell.”

Because one of the signs of a maturing business is becoming more selective about the revenue it chooses to pursue.

This Doesn't Mean Saying No to Every Imperfect Customer

There is a danger of taking this too far.

Businesses need revenue.

A new business may sensibly accept work an established business wouldn't.

A lower-margin project might open an important market.

A demanding customer may still be enormously valuable.

A strategic account might justify special treatment.

And sometimes keeping people employed and machines running changes the commercial calculation.

Context matters.

The point isn't that every customer must be perfect.

It's that you should understand why you're accepting the work.

There's a big difference between consciously taking lower-margin work for a strategic reason and accidentally filling the business with it.

A Practical Exercise

Take your ten largest customers from the last 12 months.

Don't rank them by turnover alone.

For each customer, consider:

Revenue

How much do they actually spend?

Gross margin

How profitable is the work?

Payment

How quickly and reliably do they pay?

Repeat business

How likely are they to buy again?

Cost to serve

How much time, complexity and management attention do they consume?

Capacity

How much of your scarce resource do they use?

Strategic fit

Do you want more customers like them?

Risk

How dependent are you on them?

Then ask:

If we could clone three of these customers, which three would we choose?

And:

Which customers would we deliberately not replace if they disappeared tomorrow?

Those two questions can produce a very different view of your customer base.

Growth Should Make the Business Better

This is ultimately the distinction that matters.

When you add another £1 million of revenue, what happens to the business?

Does profit improve?

Does cash improve?

Does the customer base become stronger?

Does recurring revenue increase?

Does the business become easier to forecast?

Does your market position improve?

Does the team become more capable?

Does the business become more valuable?

Or does everyone simply become busier?

Because growth that creates a weaker business isn't necessarily progress.

Final Thought

Revenue matters.

Of course it does.

Without sales, there is no business.

But as businesses mature, I think the question has to evolve.

From:

“How do we sell more?”

To:

“What do we want to sell more of — and to whom?”

That's a much better growth conversation.

Because the objective isn't simply to build a business with more revenue.

It's to build a business with better revenue.

More profitable.

More predictable.

More repeatable.

Less risky.

Better aligned with the business you actually want to build.

So next time a big opportunity lands in the pipeline, don't just ask:

“How much is it worth?”

Ask:

“What kind of business will winning this help us become?”