The Myth of Revenue Growth as a Health Indicator

Revenue growth is easy to celebrate.

It is visible. It is simple to communicate. It signals momentum to employees, vendors, and lenders. In distribution, year over year revenue increases often become shorthand for progress.

The problem is that revenue growth, by itself, says very little about the health of the business.

Several owners have told me that their most stressful years were also their fastest growing. Sales expanded. New accounts were added. Inventory levels increased. Then cash tightened, margins thinned, and operational strain surfaced.

Growth was real. Health was not.

Revenue Does Not Equal Contribution

Revenue is a gross number. It does not account for cost to serve.

If growth comes from price sensitive customers demanding aggressive discounts, gross margin percentage may decline. If growth comes from fragmented small orders, fulfillment costs may rise. If growth requires extended payment terms, receivables expand.

In each case, top line increases while underlying contribution may weaken.

It is possible to grow revenue and reduce profitability simultaneously.

Looking only at revenue obscures that risk.

Growth Can Mask Margin Compression

In distribution, margin compression often occurs gradually.

A discount here.
Freight absorbed there.
A rebate tier missed.
A competitive bid won at lower spread.

If volume is increasing at the same time, total gross margin dollars may still rise. That can create the illusion of strength.

The more relevant question is whether margin per transaction, per customer, and per SKU is stable or improving.

When revenue growth is accompanied by declining margin rate and rising operating expense, structural issues are forming beneath the surface.

Working Capital Expands With Growth

Revenue growth typically requires:

More inventory.
Higher receivables.
Greater operational capacity.

If growth outpaces working capital discipline, strain follows.

Several owners have described periods where strong sales growth led to heavier borrowing, tighter liquidity, and increased vendor pressure. The income statement suggested progress. The balance sheet told a different story.

Healthy growth aligns with capital capacity. Unhealthy growth consumes it.

Customer Mix Matters

Not all revenue is equal.

A high volume customer with disciplined ordering and prompt payment behaves differently than a similar sized customer with irregular demand and extended terms.

Revenue concentration can increase silently during growth phases. One or two expanding accounts may represent a disproportionate share of incremental sales.

Without examining mix, growth can increase exposure.

Segment analysis is often more revealing than total revenue.

Operational Strain Is a Signal

Rapid revenue expansion stresses systems.

Warehouse throughput increases.
Order complexity rises.
Customer service volume expands.
Error rates may climb.

If internal processes do not scale proportionally, service levels decline even as sales rise.

Growth that degrades execution weakens long term positioning.

When Revenue Growth Is Healthy

Revenue growth is not inherently problematic.

It is healthy when:

Gross margin percentage remains disciplined.
Contribution margin by customer is stable or improving.
Inventory turns hold steady or improve.
Receivables aging remains controlled.
Operating expenses scale efficiently.

In that context, revenue growth reflects stronger market position and operational leverage.

The distinction is not growth versus no growth. It is profitable growth versus volume expansion.

Ask Better Questions

Instead of asking whether revenue is increasing, ask:

Is contribution per order improving?
Is working capital proportional to growth?
Is margin stable by segment?
Is cost to serve understood and controlled?

These questions move the focus from optics to economics.

In distribution, the top line is visible. The underlying mechanics are quieter.

Revenue growth can be a result of health. It can also conceal fragility.

The disciplined operator treats revenue as an output, not a goal in isolation. Health is determined by the alignment of margin, capital, and execution, not by sales volume alone.