The value leak: how a 10% revenue increase became a 15% cost increase

Revenue was up, new clients were coming on and the team was growing. By every measure that gets reported in a board meeting, things were moving in the right direction.

Then someone — a new FD, an advisor coming in fresh, occasionally the founder during a quiet moment with the numbers — looked at the margin line. Not the revenue line. The margin line. And the margin had moved. Not dramatically, not in a way that triggered any alarm. Just quietly, in the wrong direction. A point here, half a point there, across twelve months. Enough to meaningfully change the economics of the business.

This is the value leak. It is particularly easy to miss because it lives inside the numbers that are working.

The cost growth nobody decided on

There is a version of cost growth that is deliberate and correct. You invest ahead of revenue and accept compressed margins during a period of scaling, because that is what building capacity requires. That is not what this is about.

The problem is the cost growth nobody explicitly decided on. The supplier relationships set up quickly during a busy period and never revisited. The software subscriptions that made sense for a thirty-person business and are now being paid for at a hundred, with a significant proportion of the licences unused or only used rarely. The agency retainer that was competitive two years ago and has not been benchmarked since. The small overheads — rounding errors in isolation — that have collectively become a meaningful drag on profitability.

None of these are significant failures. Each one is a minor oversight. Together, across a business that has been focused on growth rather than on the granular detail of its cost base, they compound.

Why 10% is the danger zone

At high growth rates — 30%, 50% or more — commercial energy tends to keep cost discipline reasonably sharp, almost by accident. The numbers are moving fast, the board is paying close attention, and everyone is scrutinising.

At 10%, something different happens. The business is growing, but comfortably enough that scrutiny naturally relaxes. Month-on-month comparisons look fine because the movement is gradual. The finance team is reporting in ways that are technically accurate but do not flag that costs are growing faster than they should relative to what the business is getting for them. A thousand pounds here and there, across different product and cost lines, begins to add up.

Vendor contracts agreed under pressure — because the business needed the service and did not have time to negotiate properly — quietly auto-renew at rates that no longer reflect the relationship or the volume. Or they were right before the proposition expanded to support a wider target customer base. Pricing that was market-competitive at inception has not been tested. Discretionary spend that was justified at an earlier stage has never been formally reviewed. On the people side, roles created for a specific purpose at a specific stage continue to be resourced at the same level even when the original purpose has shifted.

Why it does not get caught

Standard management reporting is not designed to catch this. Month-on-month variance analysis will tell you costs went up. It will not readily tell you that costs went up more than they should have relative to the value being delivered. Recharges between departments hide the root cause, as higher costs are dispersed across profit centres, projects, or allocated into stock costing.

There is also a straightforward behavioural reason. Renegotiating a supplier contract requires initiating a conversation that feels uncomfortable, particularly with someone who has been a reliable partner. Cancelling a software subscription requires someone to confirm it is not being used, which requires someone to check, which requires someone to make it a priority. These are small frictions, and they accumulate into inaction.

The vendor is not going to raise the conversation on your behalf.

Run a value review, not a cost-cutting exercise

The single most useful habit here is a cost review cadence that sits separately from the monthly P&L review.

The framing matters. Not a cost-cutting exercise — that framing creates the wrong culture and usually cuts things that matter. A value review. For each significant area of spend, three questions: what are we getting, what does it cost, and is this the right relationship at this stage of the business?

Keeping it separate from the P&L review is the point. In a monthly review, spend is examined against budget, which only tells you whether it was expected. In a value review, spend is examined against what it delivers, which is a different question and the one that actually finds the leak.

What comes next

The full article covers what else the businesses that manage this well have in common: treating procurement as a strategic function rather than an administrative one, and benchmarking deliberately rather than obsessively. It also sets out the margin recovery review — a structured look at where the margin has gone, why, and what can be recovered without disrupting the commercial relationships or operational capacity the business depends on — and why the value leak is rarely caught by the advisor who has been closest to the business for longest.

At Link Stone Advisory we work with founders and leadership teams to identify where margin has drifted and how to recover it, without disrupting the commercial relationships or operational capacity the business depends on.

We offer a free initial consultation in the strictest confidence. If you want to expect more from your board and professional advisors, contact us.