Your company earns more. Does that mean it’s better?

Imagine that you close the year and see that your company earned 20% more than the previous year. It’s good news, naturally.

There have been more sales, the business has grown and, at first glance, it seems that the company is on a positive path.

But there is a question worth asking before drawing conclusions: has this increase in turnover really brought an improvement to the company?

Not always.

Turnover is one of the numbers that any entrepreneur pays attention to. But, on its own, it does not tell us if a company is more profitable, if it has a healthy treasury or if it is creating more value.

And this difference is important.

And this difference is important

It is possible to greatly increase sales and, in the end, earn a little more or even earn less.

Think of a company that had a turnover of 1 million euros and went on to earn 1.5 million.

At first, it seems like an excellent evolution.

But imagine that, to achieve this growth, you had to lower prices, hire more people, increase production costs and accept longer payment terms from customers.

In the end, profit may not have kept pace with sales growth.

That’s why turnover and profit are not the same thing.

Billing shows us how much the company sold. Profit shows us what was left after bearing the costs of the activity.

And, for an entrepreneur, this difference can be much more important than the millions that appear in the turnover.

Growth also comes at a cost

There is another issue that often goes unnoticed: growing costs money.

A company that sells more may need more workers, more equipment, more inventory, larger facilities, or more business investment.

And then there are the customers.

If a company starts selling more, but gives customers 60, 90, or 120 days to pay, the money can take a long time to arrive.

However, suppliers want to be paid. Salaries have to be paid. Taxes too.

This is where treasury comes in.

A company can be selling a lot and still have little money available.

It seems contradictory, but it is a perfectly possible situation.

In fact, rapid growth can increase pressure on the treasury, precisely because the company needs to finance a larger activity.

And the margins? Are you keeping up?

When we look at a company, it is not enough to ask how much it sells.

We also need to understand how much you earn from what you sell.

Imagine again a company that increases its turnover from 1 million to 1.5 million euros.

If the profit goes from 100 thousand to 90 thousand euros, something deserves to be analyzed.

The company sold another 500 thousand euros, but ended the year with less profit.

There may be a perfectly legitimate explanation. Maybe you’re investing in a new area of business. Maybe you’re entering a new market or making an investment that won’t pay off until later.

But it can also mean that costs are growing too much or margins are getting tighter.

That is why the evolution of the profit margin is as important as the evolution of the turnover.

What numbers should we follow?

There is no single indicator that can tell the entire story of a company.

Billing is important, but it is worth looking at other numbers together.

Profitability

It helps to understand if the business is effectively generating results and if these results follow the growth of sales.

Profit margin

It shows how much is left in the company after costs and helps to understand if the business is becoming more or less efficient.

EBITDA

It is an indicator widely used to analyze operational performance and understand the activity’s ability to generate results.

Treasury and cash flow

Because it’s one thing to have registered sales and another to have money actually available.

Indebtedness

Resorting to financing is not necessarily negative. It can be precisely what allows a company to invest and grow. The important thing is to understand if the debt is affordable for the business.

Working capital

The greater the activity, the greater the financing needs of customers and stocks.

And there is also an indicator that does not always appear in the first financial maps, but that can make a lot of difference: the dependence on certain customers.

A company can have excellent turnover, but if a significant part depends on a single customer, there is a risk that should not be ignored.

So, when is making more money really good news?

When sales growth is accompanied by a healthy evolution of the business.

It is not necessary for all indicators to improve at the same time. There are years when a company invests more, temporarily increases debt or accepts lower margins to prepare for future growth.

The important thing is to understand what is behind the numbers.

If turnover increases, but profitability decreases, it is necessary to understand why.

If profit increases, but the treasury is constantly under pressure, there is also an issue to analyze.

If the company grows but becomes too dependent on a small number of customers, there is another type of risk.

Numbers are important. Knowing how to interpret them is even more important.

And is a company that earns more worth more?

This is another idea that should be clarified.

A company with a higher turnover is not necessarily a company with a higher value.

When looking to know how much a company is worth, several factors are considered.

Profitability, results, ability to generate cash flow, assets, debt level, customer portfolio, market position, risks and growth prospects are just some of them.

Therefore, two companies that have a turnover of 2 million euros can have very different values.

One may have interesting margins, a diversified client portfolio, little debt and good prospects for the coming years.

Another may have high costs, depend on two or three clients and have a heavier financial structure.

Billing is important. But it’s not the value of the company.

More important than making more money is to understand if we are creating more value

In the end, perhaps this is the question a business owner should ask.

Not only:

“How much did my company earn?”

But also:

“What this growth has really brought to the business?”

Did it bring more profit?

Improved margins?

Is the company generating more money?

Is the debt still under control?

Is the customer portfolio more balanced?

And, above all, is the company worth more today than it was before?

It is this more complete view that allows us to distinguish a business that simply sells more from a business that is, in fact, becoming stronger.

In short, earning more is good. Earning more with profitability, balanced cash and the ability to continue to grow is much better.

So, when you analyze the evolution of your company, don’t just stop at the billing value.

Look at the results. At the margins. At the debt. At the treasury. And at what the business might be worth in the future.

Because, in the end, a company is not only worth for what it sells. It is worth for the value it can create.

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