The Breaking Point: Is Your Business Built to Last?

Economic pressure is a reality for many business owners today. Rising labor costs, higher insurance premiums, software subscriptions, inflation, and changing market conditions are creating challenges across industries. The question isn’t whether your business will face pressure, but whether your business is built to withstand it. 

In a recent episode of Profitability Playbook: The Simple Numbers Podcast, hosts Brandon Gray and Mike Maxson explored how business owners can stress test their companies and identify potential weaknesses before they become major problems. The discussion focused on three key indicators that reveal whether a business is healthy or operating under dangerous levels of pressure. 

Looking Beyond Revenue Growth

One of the biggest mistakes business owners make is focusing solely on revenue growth. While sales are important, revenue alone does not tell the full story. 

Instead, Brandon and Mike encourage leaders to focus on gross margin dollar growth, which they describe as the true top line of the business. Gross margin dollars represent revenue minus direct non-labor costs such as materials and supplies. This measure reflects the dollars available to pay employees, cover operating expenses, and generate profit. 

Why does this matter? Because a company can increase revenue significantly while sacrificing margin. A large sale at a very low margin may boost top-line revenue but contribute little to overall profitability. Conversely, a business that consistently grows gross margin dollars is creating the financial capacity needed to support long-term growth. 

The Simple Numbers framework suggests businesses should target at least 10% year-over-year growth in gross margin dollars. Growth below that threshold can make it difficult to keep up with increasing operating costs, which often leads to declining profitability over time. 

Measuring Profitability the Right Way

The second key metric is profitability as a percentage of gross margin dollars. 

Many businesses evaluate profit as a percentage of revenue, but Mike and Brandon argue that gross margin is a more meaningful benchmark because it reflects the dollars the business actually controls. Businesses with significant pass-through costs can appear less profitable when measured against total revenue, even if they are performing well. 

According to the podcast, healthy businesses should generate a minimum of 15% profit relative to gross margin dollars, after accounting for market-based owner compensation and realistic depreciation expenses. 

Why is 15% important?

Profit has several jobs. Business owners must pay taxes, service debt, reinvest in future growth, and ideally receive a return for the risks they take as owners. When profitability drops below 15%, it becomes increasingly difficult to accomplish all of those objectives. Businesses operating below 10% profitability may find themselves in dangerous territory, while businesses below 5% may be facing significant financial strain. 

Interestingly, the hosts also noted that extremely high profitability can create its own challenges. Businesses generating more than 25% profitability may be placing excessive pressure on employees, systems, or operational resources. While strong profits are desirable, leaders should ensure growth is sustainable and not creating hidden risks within the organization. 

Cash Creates Options

The final metric discussed in the episode is perhaps the most practical: core capital.  

A business can appear profitable on paper and still struggle because it lacks cash. Brandon shared an example of a highly profitable company whose owner constantly questioned the financial statements because cash always seemed scarce. After evaluating collections, debt payments, taxes, and owner distributions, it became clear that the company had earned the profit, but much of the cash had already been allocated elsewhere. 

Simple Numbers defines core capital as cash minus any outstanding line of credit balances. Their recommendation is straightforward: maintain enough core capital to cover two months of operating expenses and labor costs. 

This reserve provides flexibility during unexpected challenges, creates opportunities for strategic reinvestment, and gives owners the confidence to make long-term decisions without constant financial stress. Businesses that fall below one month of core capital may find themselves vulnerable to customer losses, delayed payments, or other disruptions that can quickly create a cash flow crisis. 

The Bottom Line

A healthy business is about much more than revenue. To determine whether your company is truly built to last, start by evaluating whether gross margin dollars are growing by at least 10% annually, if profitability is at or above 15% of gross margin dollars, and if you have at least two months of core capital available.  

If any of these areas fall short, your business may be operating under more pressure than you realize. The good news is that identifying those pressure points early gives you the opportunity to address them before they become serious problems. Understanding your business’s health today is what helps ensure it remains strong tomorrow. If you would like help evaluating your organizational health, contact us.