Why revenue growth can hide a margin problem

A business can grow every year and still get worse at making money. We see it often in manufacturers and distributors. The owner is busy, the order book is full, and margin has slipped a few points that nobody noticed because total profit kept rising.

Why it hides

Company-level margin is an average. When you add new customers, products or freight lanes, you change the mix underneath it. Low-margin work often grows fastest, because it is the easiest to win. The average drifts down slowly, and every decision along the way looked reasonable.

Three checks you can run this month

1. Margin by product line. Pull 12 months of invoices and costs. Include the costs that usually live elsewhere: freight, rework, warranty and discounts. If your system can’t do this, a spreadsheet can. Expect at least one line to be worse than you believe.

2. Margin by customer. Sort customers by revenue, then by margin. Look at your five biggest. If their margin is below your average, your largest accounts are being subsidized by your smaller ones.

3. Margin by order size. Look at won jobs in size bands. Small orders often carry the same setup and quoting effort as large ones, at a fraction of the revenue.

What to do with the answer

You don’t need to drop customers or fire anyone. Start with the least painful moves:

• Reprice the lines where small changes matter most.

• Set a minimum order, or a small-order fee.

• Price freight and rework in, where you currently absorb them.

• Stop hand-quoting work you don’t want.

An example

A $19M components maker we worked with found that four of its twelve product lines lost money once freight and rework were counted. Fixing those, and the way it quoted, recovered 6.2 points of margin in eleven months. Read the Brightwell Manufacturing case study.

One warning

Don’t start by cutting costs. If the leak is pricing or mix, cost cuts shrink the business without repairing it. Find the leak first, then decide.