A revenue target becomes a credible growth plan when leaders agree which business to win, what it will take to serve it and how the resulting profit will be earned.
The sales director has a plan to close the gap. A few larger accounts, sharper pricing on competitive bids and more flexibility for customers who need something outside the standard offer. Operations asks for people. Finance wants the hiring held back until the orders arrive. The revenue target survives the meeting, while the conditions attached to it remain unresolved.
That leaves a consequential decision with whoever negotiates the next contract. A discount, a delivery promise or an exception to the service model will determine what the business has to provide. By the time those choices appear in the profit and loss account, changing them may involve reopening a customer agreement.
The commercial plan therefore needs to explain how the business intends to earn its additional profit before it commits to the sales that are supposed to produce it.
Follow the extra revenue through the business
Consider a business supplying equipment and technical support, using illustrative figures. It currently earns €10 million in annual revenue at a gross margin of 40%. Operating expenses below gross profit are €3 million, leaving €1 million in operating profit.
The next plan calls for 20% revenue growth. Existing activity is assumed to remain unchanged, and the additional €2 million comes mainly from larger accounts. Winning those contracts requires lower prices and a different product mix, reducing the gross margin on the new sales to 30%.
Those sales add €600,000 in gross profit. However, the accounts also require more implementation work, specialist support and account coordination. The company estimates €450,000 in additional annual operating expenses, separate from the costs already included in gross margin.
Revenue rises by 20%; operating profit rises by 15%. The additional business earns an operating margin of 7.5%, below the existing business’s 10%.
That could be acceptable. The contracts might establish a useful market position, and the first year might carry costs that subsequent years will not. But the plan should explain those expectations. Management also needs to know what happens if implementation takes longer, prices remain low at renewal or another specialist has to be hired before the next account can be served.
A plan that presents the additional sales at the company’s existing average margin would conceal these choices.
Examine what the customer is being promised
Gross margin is only part of the explanation. Two accounts buying the same equipment can create quite different demands on the organisation. One accepts a standard configuration and a planned delivery. Another needs repeated technical reviews, phased installation and a named specialist available at short notice.
Robert Kaplan and Steven Anderson’s 2004 HBR article “Time-Driven Activity-Based Costing” provides a useful way to examine these differences by estimating the capacity that transactions and customers consume.
A leadership team can start with the activities most likely to change the decision. For the equipment supplier, that might mean reviewing implementation hours and support requirements across a small set of comparable accounts, then checking those estimates with the people doing the work.
The distinction between consumed capacity and additional expenditure matters. An account may use staff who are already employed, so an allocation of their time does not represent an immediate cash saving if the account disappears. Yet their time still has a limit. A contract that absorbs the remaining technical capacity can force a hire or prevent the company from serving another customer.
That gives management several possible responses. It can charge for implementation, define support more clearly, change the configuration or improve how the work is delivered. A demanding customer may also be showing the business where its standard service is inadequate. The cost analysis should help improve the relationship before becoming a reason to abandon it.
Rebuild the commercial proposition
Suppose the supplier develops an alternative plan. It concentrates on customers whose requirements fit a repeatable configuration, introduces a separately priced implementation package and defines which support is included. Accounts needing more intensive service can still buy it on different terms.
Under a second set of illustrative assumptions, the company could generate the same €2 million in additional revenue at a 35% gross margin, with €200,000 in additional operating expenses. That would add €500,000 to operating profit, compared with €150,000 in the original plan.
Scroll horizontally to compare all scenarios.
| Annual figures | Current business | Proposed growth plan | Revised plan |
|---|---|---|---|
| Revenue | €10,000,000 | €12,000,000 | €12,000,000 |
| Gross profit | €4,000,000 | €4,600,000 | €4,700,000 |
| Operating expenses | €3,000,000 | €3,450,000 | €3,200,000 |
| Operating profit | €1,000,000 | €1,150,000 | €1,500,000 |
| Operating margin | 10.0% | 9.6% | 12.5% |
With the same revenue, total operating profit would be about 30% higher than in the original plan.
The difference is large enough to investigate. It is not yet a forecast. Customers might reject the implementation charge, the narrower offer might reduce the available pipeline, and competitors might include the service in their price. Sales would need to test the proposition with plausible buyers and establish whether there was enough business to support the target.
This is where commercial judgement enters the calculation. A spreadsheet can show what would be attractive. Customer conversations, bid evidence and delivery experience establish whether the company has a credible way to achieve it.
Decide what must move before the orders arrive
The alternative plan also requires management choices. Someone has to develop the implementation package, price it and give the sales team a workable way to explain it. Technical staff need time to make the configuration repeatable. If they remain fully occupied handling exceptions for existing accounts, the new model will struggle to get started.
McKinsey’s research on resource-allocation inertia examines how organisations can retain established spending patterns despite changes in strategy. For a smaller business, the same question can be put directly: whose time and which budget will move to make this plan possible?
Sales incentives deserve the same attention. Rewarding booked revenue alone could encourage the discounts and service commitments the revised plan is meant to change. Measures should reflect what sales can influence, such as agreed pricing and service scope, while management remains accountable for delivery efficiency.
Payment terms belong in the same discussion. If the larger accounts pay 90 days after invoicing, the supplier may already have paid for equipment and assigned specialists before receiving their cash. Deposits or staged payments could change how many contracts it can support at once.
When the supplier returns to the plan, the discussion should reach the actual terms of growth: which customers it will pursue, the offer they will receive, the resources committed and the evidence that would prompt a change. Those decisions need to be made together, while there is still room to alter the proposition.
Otherwise, the next contract will make them for the leadership team.