You cannot bank a growth rate

Sales get managed weekly. Costs get looked at once a year, usually after something has already gone wrong. The number at the bottom is whatever survives that process, which makes it a leftover rather than a plan.

Bill Gates put the whole sequence into one line in a Playboy interview in July 1994, describing the business-type thoughts that sneak in between hoping the customers pay and hoping the work ships on time: take sales, take costs, and try to get to a big positive number at the bottom. Three steps. Most people only ever run the first one.

Revenue is a claim. Margin is a result.

Revenue tells you the market said yes. Margin tells you whether you can afford the next yes.

Two companies can grow at the same rate and be travelling in opposite directions. One is winning work at a price that funds the next hire. The other is winning work at a price the market set, and covering the gap out of its founder's patience and savings. From outside, both look like momentum. Only one of them is.

Growth on a falling margin has a tell. The business needs more cash the better it does. In most businesses that invoice after delivery, a new customer consumes cash for months before it returns any, so you borrow or raise to fund your own success. That is a strange thing to write down and a very ordinary thing to watch happen.

The lever you are least likely to pull

When margin is thin the instinct is to sell more. More leads, more proposals, more activity. It feels like progress, and it is the slowest and most expensive repair available to you. Three other levers move faster.

• Price. Whatever part of a price rise you can defend lands closer to the bottom line than the same money won by selling more, because most of the cost upstream of it is already paid. Commission and payment fees still take their cut. It is usually the first lever available and the last one discussed.
• Mix. Not all of your revenue is the same quality. Some of it quietly subsidises the rest. Until you have margin by service line and by customer, you are managing an average that describes nothing you actually sell.
• Cost to serve. Not the cost line in your accounts, but the hours, rework, approvals and senior time a job consumes before it is finished. This is where good revenue turns mediocre without anyone recording the moment.

Where I learned it properly

I ran serviced apartments and a venue, with the profit and loss in my name. In that industry the seductive number is occupancy. You can fill a building almost any night you choose, if you are willing to drop the rate far enough.

Every room you fill that way still needs linen, cleaning, amenities, a person on the desk, commission to whoever sent the guest, and a card fee. A full house at the wrong rate can be more work and less money than a quieter one at the right rate. You only recognise that if you are looking at what is left, not at what came in.

Eighteen years. Five businesses built and sold. I made my first million at 28. I lost it all at 40.

What a buyer is actually pricing

When you sell, nobody is buying your top line. They are buying what is left after you have paid to produce it, and how confident they are that it will still be there next year without you. In my experience buyers do not read fast growth on a thin margin as ambition. They read it as a business that has not yet proved it works.

Start here this week

Take the last twelve months of revenue and split it by customer or by service line. Next to each one, put your best honest estimate of the fully loaded cost of delivering it, including your own time at a real rate. Rank the list by margin, not by revenue.

Then look at whether that order matches the one you carry in your head. Where it does not is where your attention has been going to the wrong customers.

Take the worst line on the list and do one of three things by Friday: reprice it, change how you deliver it, or stop selling it. One line, one decision. Do it before you look at next quarter's pipeline.