Revenue grows 20%. Profit grows 5%. Then another business grows revenue by 20% and sees profit gr...Revenue grows 20%. Profit grows 5%. Then another business grows revenue by 20% and sees profit gr...
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Hân's avatar
Hân Phạm
• Sep 16
Revenue grows 20%. Profit grows 5%.
Then another business grows revenue by 20% and sees profit grow by 60%.
How can the same rate of revenue growth produce such different results?
One reason is operating leverage.
It comes down to how a business's cost structure behaves as sales increase.
Imagine a business has:
$100K revenue $60K variable costs $30K fixed costs $10K operating profit
Now revenue increases by 20%.
If variable costs rise with sales but fixed costs stay relatively stable:
$120K revenue $72K variable costs $30K fixed costs $18K operating profit
Revenue increased by 20%.
Operating profit increased by 80%.
That's operating leverage in action.
The same mechanism can work in the opposite direction.
When sales fall, a business with high fixed costs can see profits decline much faster than revenue.
This is why two companies with similar revenue can have very different risk profiles.
It also changes how we should think about growth.
Before expanding, a business should understand:
→ How much of its cost base is fixed? → How much increases with each additional sale? → How much spare capacity already exists? → What happens to profit if revenue grows 10%? → What happens if revenue falls 10%?
Growth isn't just about selling more.
It's also about understanding what happens to the cost structure when you do.
A business with strong operating leverage can scale quickly when demand is strong.
But the same structure can create pressure when demand weakens.
That's why revenue growth alone doesn't tell the whole story.
Sometimes, the most important part of a growth strategy is hiding in the cost structure.
How much attention do you think businesses should pay to fixed vs. variable costs when planning growth?
#BusinessFinance #FinancialAnalysis #OperatingLeverage #BusinessStrategy #FPandA #FinancialPlanning #Entrepreneurship #SmallBusiness
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