When sales are up, but profit isn’t — what are SME leaders to do

Your sales are growing. But somehow, your profit hasn’t budged — or worse, it’s shrinking. You’re working harder, yet cash generated from operations is declining.

So… who moved your cheese?

👉 The truth is, as your business evolves, the rules of the game change. What used to work — hustling harder, hiring more, doing more — starts yielding diminishing returns. You’re generating more activity, but not necessarily more shareholder value. Chances are, your business has simply outgrown its original leverage model.

The compelling mindset shift: from owning to orchestrating

A key insight from a classic Harvard Business Review article, Leveraged Growth: Expanding Sales Without Sacrificing Profits, is that many businesses scale up the wrong way. They assume that growth requires owning more — more equipment, more staff, more infrastructure.

But as author John Hagel explains, “The pursuit of growth, therefore, almost always entails a narrowing of margins – for a time or, in the worst case, forever”. He likens outsourcing as a form of leverage for growth. His argument is compelling: companies that thrive in fast-changing environments grow through orchestration, not ownership. That’s leveraged growth: scaling faster by mobilising others’ capabilities rather than stretching your own workforce and balance sheet.

For South African SMEs, this might look like:

• Outsourcing deliveries to a logistics partner instead of getting into debt to buy a fleet. Just because you can buy something doesn’t always mean you should. Think opportunity cost and risk management.
• Using trusted software for task or project management (such as Monday.com), instead of developing an in-house app that could tie up resources in research and development — and potentially result in sunk costs later. Think team bandwidth, not just tech ownership.
• Partnering with an accounting firm instead of building a finance capability in-house. Just because it looks easy to do it yourself doesn’t mean it is. Think strategic decision-making anchored in fit-for-purpose internal controls.

Each of these choices helps reduce your fixed-cost base and increase your agility when markets shift.

Understanding your levers: operating, financial, and leveraged growth

Here’s how to think about the different levers in your business:

Operating Leverage

• What it means: How much of your costs are fixed vs. variable. In other words, how much would an increase in sales increase your profit without increasing your fixed costs? The higher your fixed costs, the more profits swing with sales — meaning the more profit you can make from growth, since your fixed costs are already a “sunk cost.”
• Risk profile: High fixed costs = big gains in good times, big losses in slow months.
• Example: Owning equipment and salaried staff vs. outsourcing on demand.

Financial Leverage

• What it means: Using borrowed money to grow faster than cash from normal operations would allow.
• Risk profile: Increases both upside and downside — success depends on cash flow discipline. The bank still expects its interest payments, even when sales are down.
• Example: Taking a loan to buy vehicles or machinery.

Leveraged Growth

• What it means: Using other people’s assets, systems, or expertise instead of owning them outright.
• Risk profile: Lower capital risk, higher flexibility.
• Example: Partnering with suppliers, service providers, or networks that already have infrastructure or proven business processes in place.

And how do you know which lever to pull — and when? It depends on your current operating and financial context, strategic outlook, and risk appetite. But the principle remains the same:

👉 Short-term growth should multiply long-term opportunities without increasing your cost structure and risk profile disproportionately.

The danger of growing heavy

When SMEs expand too fast with high fixed costs, profits can disappear even as sales rise. You feel busier than ever — but the numbers don’t move. That’s because your operating leverage (those fixed monthly costs) is eating into margins.

To fix it, you need to:

• Reassess which costs are truly necessary for control or brand value.
• Convert fixed costs into variable ones wherever possible (e.g. rent, payroll, software).
• Strengthen your cash conversion cycle — turn revenue into cash faster by managing debtors and stock tightly.

Building for the long term

The ultimate question isn’t just “How do I grow?” but “How do I grow without breaking my team and cash flow engine?”

👉 That’s where leveraged growth thinking becomes a game changer. When you focus on being the orchestrator of your non-core capabilities rather than the owner, you protect your cash flow, preserve optionality and mental bandwidth, and create space for long-term strategic growth. Remember — slow and steady still wins the race.

Reflection for SME Leaders

• Are you growing ownership or leverage?
• Which costs could become partnerships instead of fixed burdens?
• How might your business model evolve if you stopped doing everything yourself — and started orchestrating instead?

👉  Maybe your cheese hasn’t disappeared at all. It’s simply waiting — in abundance — where your smart partnerships and alliances begin. Because growth is about progress, not perfection.

🔖 References:

• Harvard Business Review article “Leveraged Growth: Expanding Sales Without Sacrificing Profits,” by John Hagel III (October 2002).