Growth or profit? How a small business can decide

Begin with the difference between profit and cash, because most of the trouble starts there. Profit is what remains after costs, as recorded in your books. Cash is the money in your account. When you sell on credit, the sale counts towards profit the day you deliver, but the money arrives weeks later. When you buy stock, the cash leaves now but the cost reaches profit only when you sell it. A business that is growing fast is usually paying out before it is paid, so cash can shrink even while profit looks good.

Here is a hypothetical example, with round and made-up numbers. A small supplier sells goods worth 100 a month, with a profit of 10, and customers pay after 30 days. It wins a big order that doubles sales to 200. To serve it, the supplier buys extra material and pays extra wages before the customer pays. The profit on paper rises to 20, but for a month or two the business must find roughly another 90 in cash to fund the stock, wages and the wait. If it cannot, the growth will not be completed, or the supplier will borrow on terms that eat the profit.

So the first thing to learn is what each sale really earns. For each product, service or customer group, take the selling price and subtract the costs that arise directly from delivering it: materials, direct labour, packing, delivery, payment charges, returns and any free extras. What is left is the contribution, the amount available to pay rent, salaries and other fixed costs and then to give you a profit. Many owners are surprised. A few items earn most of the money, and some popular ones barely cover their costs or lose money once the time spent on them is included.

Include your own time. If you work fifty hours a week and take nothing from the business in wages, the profit figure flatters you. Give your time a fair value and see what remains.

Next, look at discounts. Say an item sells for 100 and costs 70 to supply, leaving 30. A ten per cent discount takes 10 off the price, so the margin drops to 20. To earn the same total margin, you now have to sell half as many again, 50 per cent more units. Very often that does not happen. A discount that looks small can need a large increase in sales just to stand still. Before offering one, calculate how many extra sales it needs, and whether you can supply them.

Look also at large orders and demanding customers. A big buyer who negotiates hard and pays late may bring in sales while costing you cash and margin. Sometimes it is worth it, because it fills idle capacity or opens a door. Sometimes it is not. The only way to know is to count what the customer really contributes after the discount and the wait.

Now work out what growth would tie up. Take a modest increase, say ten or twenty per cent more sales. How much extra stock would you hold? How much more would customers owe you at any time? Would you need another person or more space before the sales arrive? Add it up. If the answer is more cash than you have, either the growth must be slower, or you need a plan for funding it, ideally before the orders come.

If you do borrow to grow, be careful and specific. Know what the money is for, when it will pay back, and what the repayments will be if sales come in lower than planned. Read the written terms, including fees and what happens on late payment, and discuss them with your accountant before signing. Check the current rules for any government scheme or lender you are considering, rather than relying on hearsay.

With these figures in hand, you can decide what the business needs now. Growth is usually the right priority when margins are healthy, cash is comfortable, demand exceeds what you can supply, the business gets cheaper to run as it grows, and you have the people and routines to cope. Protecting profit and cash is usually the right priority when margins are thinning as you grow, you rely on borrowing to pay routine bills, customers are paying later and later, quality is slipping, or you are stretched too thin. Holding steady for a quarter to tidy up is often what makes the next stage of growth safe. There is also a third case: if neither growth nor profit is good, the question may be whether the business model needs to change, which is a different conversation.

Whatever you choose, write it down. One sentence will do: for the next three months, our priority is protecting cash, so we will not accept orders on payment terms longer than 30 days. A written priority gives you something to say yes or no against when an opportunity arrives.

Finally, watch a few numbers regularly. A reasonable set is the margin on your main products, the cash in the bank against what you owe in the next month, and the amount owed to you that is more than 30 days late. Look at them every month at a fixed time. If you do not currently know these three, finding them out is your best work for this week.