All businesses want to turn a profit. For most British companies, turnover is the main measure for growth.
In fact, 40 per cent of the executives responding in AIB (GB)’s Steps to Growth 2017 survey report turnover as the only measure they use. Recruitment and hotels and leisure companies are, unsurprisingly, concerned with number of customers. Amount and quality of new hires, extent of exports and reaching new markets also feature heavily.
Of the sectors surveyed, healthcare and manufacturing are the most optimistic. Some 68 per cent of healthcare respondents and 59 per cent of manufacturing respondents anticipate growth of 21–40 per cent over the next five years. The healthcare sector is benefiting from an ageing population and the opportunity to provide cost-saving innovations to the NHS. Some companies in the manufacturing sector are capitalising on the weak pound to boost their order books.
The limits of revenue-counting
These days, says Isla Wilson, business growth consultant at Ruby Star Associates, “turnover can be quite an old-fashioned means of measuring business growth. It is often rooted in the assumption that profit remains a near-constant proportion of turnover, and that your business will grow by delivering more of what you do, in roughly the same way.”
In a world of global markets, technological innovation and disruptive models, measuring growth exclusively by turnover runs the risk that you will miss opportunities to do more for less, price your product or service based on value, or simply change the way you do business.
“One common pitfall that we see when businesses focus on turnover is that service businesses tend to price projects based on a day rate (which builds in an assumed level of profit),” Wilson explains. “This isn’t a bad model in principle, but it can lead to businesses feeling trapped in a cycle where all they can ever do is sell available time in exchange for a capped amount of money. This is a model which can be hard to scale, and which can be limited by the availability of the most senior/experienced resources.”
“The key is to find a measure which truly reflects the business you are trying to build”
It is also easy to lose the link between what something is worth to the market and what it costs you, Wilson adds. “After all, if you get quicker and quicker at delivering something, you may be tempted to reduce price (based on the day-rate model), even though the value of the outcome should remain unchanged.”
Another key risk of measuring turnover, says Wilson, is that you don’t pay enough attention to profit and simply scale up a model that doesn’t generate sufficient returns or makes a loss. This is because, even if you are building a not-for-profit model, you will likely need surplus to reinvest or to build in resilience.
Profit can function as a more useful measure, Wilson advises: “It is useful to give some consideration as to whether you should measure profit as a percentage (which has some of the same pitfalls as using turnover as a key metric) or whether what really matters is the profit expressed as a sum of money (or even the amount of profit retained and reinvested).
All the ways to measure growth – workforce, customer numbers, impact, social value, even reduction in hours spent by a key director – are valid in their own ways. The key is to find a measure which truly reflects the business you are trying to build.”