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The Growth Trap: Why More Revenue Doesn't Always Mean More Profit · Profit Points Podcast

• 0:00
  SPEAKER_00: Hey, glad you're here.
• 0:01
  SPEAKER_00: This is Profit Points, and I'm Megan Schwann, your accounting sidekick and certified profit first professional and fix the snips advisor.
• 0:09
  SPEAKER_00: If you're a small business owner who wants to actually understand what is happening in your business financially, not just survive it, but genuinely get it, you're in the right place.
• 0:20
  SPEAKER_00: Every episode covers one concept, uses real numbers, and ends with something you can actually do.
• 0:26
  SPEAKER_00: That's the deal.
• 0:27
  SPEAKER_00: Let's talk about today's topic.
• 0:31
  SPEAKER_00: Can I ask you something?
• 0:33
  SPEAKER_00: Have you ever had a genuinely good revenue month?
• 0:38
  SPEAKER_00: Like numbers you were proud of, and yet you still financially felt financially tight by the end of it, still felt like something was off.
• 0:52
  SPEAKER_00: I hear this constantly, and I want to talk about it today because it is one of the most disoriented, frustrating, overwhelming experiences that you can have in business.
• 1:05
  SPEAKER_00: One of them.
• 1:19
  SPEAKER_00: Today I want to tell you why, and more importantly, what to do about it.
• 1:30
  SPEAKER_00: Goodness.
• 1:31
  SPEAKER_00: And this is Profit Boys.
• 1:34
  SPEAKER_00: Um, so this is a scenario that I see all the time.
• 1:37
  SPEAKER_00: A business, for example, is doing$10,000 a month.
• 1:41
  SPEAKER_00: The owner works hard.
• 1:43
  SPEAKER_00: She grows her client base, she gets referrals, and then within 18 months, she's doing$18,000 a month.
• 1:52
  SPEAKER_00: That's revenue that is up 80%.
• 1:56
  SPEAKER_00: And that should feel amazing, right?
• 2:00
  SPEAKER_00: But it doesn't.
• 2:02
  SPEAKER_00: Because expenses grew right alongside the revenue, or sometimes even at a faster rate.
• 2:10
  SPEAKER_00: And before she knows it, she's hired a VA, she's upgraded her software, she invested in a new marketing strategy, shiny penny syndrome.
• 2:22
  SPEAKER_00: She moved into a bigger workplace.
• 2:25
  SPEAKER_00: She added some support staff to handle that increased volume.
• 2:29
  SPEAKER_00: And now her monthly expenses that were$7,000 are now a whopping$15,000.
• 2:37
  SPEAKER_00: So her revenue grew by$8,000, but her expenses also grew by$8,000, which math problem means her profit, that number that actually matters, is virtually unchanged.
• 2:55
  SPEAKER_00: Nothing changed.
• 2:56
  SPEAKER_00: This is what I call the growth trap.
• 2:59
  SPEAKER_00: It happens when a business scales its cost at the same rate as revenue, sometimes even faster, without intentionally protecting that margin.
• 3:09
  SPEAKER_00: And it's incredibly common because that revenue growth feels like a whole lot of progress, and it is, but undisciplined growth can actually compress your profitability even as your top line climbs.
• 3:25
  SPEAKER_00: This is often why businesses can get to millions of dollars.
• 3:29
  SPEAKER_00: Um, and yet they still are paying themselves.
• 3:32
  SPEAKER_00: Owners are still paying themselves$20,000,$30,000,$40,000, barely anything when their business is making millions of dollars.
• 3:47
  SPEAKER_00: So growth profit requires intentional systems and margin discipline, not just more revenue.
• 3:59
  SPEAKER_00: And let me explain the mechanics here.
• 4:02
  SPEAKER_00: There are two types of costs in your business: fixed cost and variable cost.
• 4:08
  SPEAKER_00: Fixed costs are the things that stay roughly the same regardless of revenue.
• 4:13
  SPEAKER_00: You can probably think of something right now: your rent, base software subscriptions, your own salary if you're paying yourself consistently, insurance, variable costs, however, they also scale with revenue.
• 4:28
  SPEAKER_00: Things like contractor hours, maybe direct support staff, materials, transaction fees.
• 4:36
  SPEAKER_00: These are things that increase as you serve more clients.
• 4:40
  SPEAKER_00: When you grow, your variable cost should go up proportionally.
• 4:46
  SPEAKER_00: In pair wealth.
• 4:47
  SPEAKER_00: That's expected and it's fine.
• 4:49
  SPEAKER_00: The problem comes when your fixed costs also balloon with every revenue.
• 4:58
  SPEAKER_00: When you hire proven the revenue, you maybe upgrade to a bigger staff or bigger space, excuse me, based on a few good months, or because you think it's what you're supposed to do, right?
• 5:12
  SPEAKER_00: When you add team members to handle your current volume without modeling what the margin impact will be, without having those systems in place to make sure you're being efficient, all of those things matter, which is why we talk about a lot of these things on this podcast uh show.
• 5:30
  SPEAKER_00: So let's take a look briefly at what math looks like when we're talking about this.
• 5:37
  SPEAKER_00: So, for example, your business makes$15,000 per month.
• 5:42
  SPEAKER_00: Fixed costs are$4,000, variable costs are around 30% of your revenue.
• 5:48
  SPEAKER_00: So$4,500.
• 5:51
  SPEAKER_00: This means that your profit is$6,500.
• 5:55
  SPEAKER_00: I know I threw all that money numbers together.
• 5:58
  SPEAKER_00: You can write it down when we want.
• 5:59
  SPEAKER_00: Basically, though, this what this means is that their profit, the net profit, is a 43% margin.
• 6:05
  SPEAKER_00: This is actually a really healthy percentage.
• 6:08
  SPEAKER_00: That's great.
• 6:09
  SPEAKER_00: So now in the scenario, let's say you hire two part-time contractors to help you grow, that another$3,000 per month.
• 6:18
  SPEAKER_00: So your revenue growth is fixed costs are$7,000 or$3,000 more.
• 6:33
  SPEAKER_00: So your total expenses are now$13,000.
• 6:37
  SPEAKER_00: So profit is$7,000 on$20,000 of revenue.
• 6:41
  SPEAKER_00: Your margin dropped from 43% to 35%.
• 6:46
  SPEAKER_00: Revenue is up$5,000, but your profit actually went down.
• 6:52
  SPEAKER_00: Profit only went up$500.
• 6:55
  SPEAKER_00: And you ended up working a whole lot harder for that$500.
• 7:00
  SPEAKER_00: This is why math is important, though.
• 7:03
  SPEAKER_00: Now, and I want to make it clear: I'm not saying to not hire.
• 7:07
  SPEAKER_00: Hiring is actually really necessary for growth, but the timing matters, the numbers matter.
• 7:14
  SPEAKER_00: You want to see revenue growth outpace, go beyond your expense growth.
• 7:21
  SPEAKER_00: That's what creates sustainable margin-positive growth.
• 7:26
  SPEAKER_00: And this is what it needs to look like to be able to create a sustainable and successful business.
• 7:34
  SPEAKER_00: And you can only track that.
• 7:37
  SPEAKER_00: You can only track it if you're watching your margin and not just your revenue.
• 7:42
  SPEAKER_00: You have to keep an eye on both, which is why your bookkeeping is so important because these are numbers that are real basic that you can set up to be able to see on your profit and loss.
• 7:54
  SPEAKER_00: So that is gonna be your action step for this profit points.
• 7:59
  SPEAKER_00: You want to make sure you pull up around six months worth of financials.
• 8:04
  SPEAKER_00: Um, you can put it, pull it from your bookkeeping software if your bookkeeping is up to date.
• 8:09
  SPEAKER_00: Create a line chart.
• 8:12
  SPEAKER_00: One line that shows revenue, the other one that shows expenses.
• 8:17
  SPEAKER_00: And you need to see, are they moving together?
• 8:21
  SPEAKER_00: Are they parallel in growth?
• 8:23
  SPEAKER_00: Is one growing faster than the other?
• 8:26
  SPEAKER_00: I always tell people, your it should not look like this or like this, you know, where it's like your ex your revenue is growing, but so are your expenses at a at a higher rate.
• 8:41
  SPEAKER_00: They need to be above or parallel to your revenue line.
• 8:48
  SPEAKER_00: If it where your expenses need to be below or parallel to your revenue line, excuse me.
• 8:54
  SPEAKER_00: If your expense line is above or higher than that revenue line, that's a signal that you need to pause and evaluate before you add any additional cost.
• 9:05
  SPEAKER_00: If your revenue line is pulling away from expenses, if they're expanding, then you're scaling with a healthy margin expansion and you want to continue to go.
• 9:15
  SPEAKER_00: But you got to look at that information, you got to look at the data to see where it's going.
• 9:20
  SPEAKER_00: And visuals are great.
• 9:22
  SPEAKER_00: We process visuals better a lot of times than other things.
• 9:26
  SPEAKER_00: Growth in and of itself is not the goal.
• 9:30
  SPEAKER_00: Profitable growth is the goal, and they're not the same.
• 9:34
  SPEAKER_00: The business owner who builds real lasting wealth are not the ones who grew the fastest, oftentimes.
• 9:42
  SPEAKER_00: They're the ones who grew in a way that preserved and expanded their margins over time.
• 9:49
  SPEAKER_00: That takes intention, intentionality, and discipline.
• 9:52
  SPEAKER_00: We talk about that a lot on this podcast.
• 9:55
  SPEAKER_00: Um, it takes, you got to take watching the numbers, you got to make it part of your process, part of your job as CEO is to keep an eye on those numbers.
• 10:06
  SPEAKER_00: Um, and it's doable.
• 10:08
  SPEAKER_00: And when you start getting into it, when you start looking at your specific numbers, the payoff is enormous.
• 10:16
  SPEAKER_00: So make sure you take those action steps.
• 10:19
  SPEAKER_00: If your revenue is growing, but your profit isn't keeping up.
• 10:23
  SPEAKER_00: I want to have a conversation with you.
• 10:26
  SPEAKER_00: This is a fixable problem, and it's exactly the kind of work that we do at Sidekick Accounting.
• 10:32
  SPEAKER_00: So go to chatwithmeg.com, book your strategy call, look at the show notes for some more additional information, and stay tuned.
• 10:42
  SPEAKER_00: I will see you on the next episode and make sure you take that action item seriously.
• 10:48
  SPEAKER_00: You can grow a successful and sustainable business.
• 10:51
  SPEAKER_00: You can do it, it is achievable, and all it takes is a little bit of time, effort, and intentionality.
• 10:58
  SPEAKER_00: All right.
• 10:59
  SPEAKER_00: See you next time.
• 11:00
  SPEAKER_00: All right, that's your episode this time.
• 11:02
  SPEAKER_00: Don't forget your action step.
• 11:04
  SPEAKER_00: I want you to actually do it, not just add it to the list.
• 11:08
  SPEAKER_00: If this episode was helpful, share it with a fellow business owner who needs to hear it.
• 11:12
  SPEAKER_00: And if you're ready to go deeper on your specific numbers, book a strategy call with Sidekick Accounting.
• 11:17
  SPEAKER_00: Go to chatwithmeg.com, and I'll see you next time on Profit Points.