Revenue Is Growing. But Is Your Business Actually Getting Stronger?
Published by Stephen Kamau Kinyanjui, CPA(K)
Revenue Is Growing. But Is Your Business Actually Getting Stronger?
Growing revenue can create confidence, but revenue alone does not tell you whether a business is becoming financially stronger, operationally better or more valuable.
Business owners naturally celebrate increasing sales. More customers, bigger contracts and higher turnover are visible signs of progress. But one of the most important questions management should continue asking is:
Is the business actually becoming stronger as revenue grows?
A company can increase revenue substantially while simultaneously weakening its cash position, margins, working capital and balance sheet.
The problem is not growth itself. The problem is growth without sufficient financial and operational discipline.
Revenue is only one part of the story
Consider a business whose sales increase from KSh 50 million to KSh 70 million.
At first glance, 40% revenue growth appears impressive.
But imagine that during the same period:
• Gross margins fall from 35% to 27%.
• Operating expenses increase by 50%.
• Customers take longer to pay.
• Inventory grows faster than sales.
• Supplier balances become increasingly overdue.
• Bank borrowing rises.
• Cash generated from operations declines.
The business is bigger—but it may not be stronger.
Management therefore needs to look beyond the top line.
Growth should strengthen profitability
One of the first questions should be:
How much additional profit is being generated from the additional revenue?
If revenue increases by 30% but operating costs increase by 40%, the business may actually
be creating more activity without creating more value.
Management should regularly monitor:
Gross margin — Are products or services maintaining healthy margins?
Operating margin — Is overhead growing faster than the business?
EBITDA / operating profitability — Is the core business generating stronger earnings?
Return on capital — Is additional investment producing acceptable returns?
Growth should improve—not destroy—cash flow
Profitable businesses can still experience serious cash-flow problems.
A company may record revenue today but wait 60 or 90 days to collect the cash. Meanwhile, salaries, rent, suppliers, taxes and operating costs still need to be paid.
Similarly, a retail or distribution business may use increasing amounts of cash to purchase inventory before receiving money from customers.
This is why management needs to understand the relationship between:
Revenue → Profitability → Working Capital → Cash Flow
Growth that continually requires emergency borrowing, delayed supplier payments or repeated owner cash injections deserves closer examination.
Growth should build management capability
Another warning sign appears when every increase in revenue creates more pressure on the founder.
As the business grows, management structures should become stronger.
There should be clearer:
• Roles and accountability
• Reporting structures
• Decision-making processes
• Financial controls
• Performance measures
• Systems and operating procedures
If the founder remains involved in nearly every important operational decision, the business may be growing faster than its management capacity.
The better question
Instead of asking only:
“How much did our revenue grow?”
Management should also ask:
Did profitability improve?
Did we generate more cash?
Did our working-capital position strengthen?
Did our return on investment improve?
Did our systems become more scalable?
Did the business become less dependent on particular individuals?
Sustainable growth is not simply about becoming bigger.
It is about building a better business as you grow.
At Scaybiz Services, we work alongside founders, business owners and management teams to strengthen financial visibility, business systems, management capability and the
foundations required for sustainable growth.
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