How companies make money

Sales Academy · from no sales experience to landing an AE job, with a UK life-sciences & health-tech specialism. UK English. No prior sales experience assumed; every term is defined at first use.

Beginners rarely lose deals because their product knowledge is thin. They lose them at the meeting where a finance person joins the call, the conversation stops being about features and starts being about money — and the seller has nothing to say.

That moment is teachable. A buyer's business runs on a small number of mechanisms: how revenue becomes profit, why profit is not cash, where budgets come from and when they close, what a business case must prove, and who signs it. This module is those mechanisms with the arithmetic worked out. It will not make you an accountant; it will make you commercially literate.

What you'll learn

• Revenue, cost of sales, gross margin and operating profit — and why profit is not cash, worked through a company earning £300k of profit while its bank balance falls £300k.
• Capex versus opex, why "can we make it opex?" is a genuine lever, and why leasing no longer converts capital spend to revenue spend in the NHS.
• How to research a target company in forty minutes — Companies House, strategic reports, NHS board papers, job adverts.
• The SaaS model from the investor's side: ARR/MRR, margin norms, CAC payback, the rule of 40 (defined honestly), why churn compounds, and how your deal's terms move numbers finance watches.
• How budgets work: planning cycles, budget holders versus approvers, capital versus revenue, use-it-or-lose-it (and where that folklore is wrong), the NHS April–March year, pharma's calendar, and the 1 January 2026 procurement thresholds.
• The business case your buyer must write, who signs it, and payback, ROI and NPV on one shared example.
• The vocabulary and questions that make you sound commercial — and the three sentences that expose you.
• How NHS trusts, pharma and pre-revenue biotech differ financially: cost versus profit centres, cash-releasing savings, burn and runway, grant cycles.

1. How companies make money

Revenue (the "top line", or "turnover" in UK accounts) is what customers were charged in the period — not what they paid. Cost of sales (COGS) is what it costs to deliver what you sold, and it scales with volume. Gross profit = revenue − cost of sales; as a percentage of revenue, gross margin, the most diagnostic number about a business model — a software company at 80% can afford an expensive salesforce, a distributor at 12% cannot.

Operating expenses are the costs of running the company that don't scale per sale: sales and marketing, R&D, and general and administrative. Operating profit = gross profit − operating expenses, also called EBIT; below it sit interest and tax, giving profit after tax. EBITDA adds back depreciation and amortisation to approximate the cash the trading operation throws off.

Worked example 1 — a P&L you can read in sixty seconds

Illustrative figures, mid-sized UK lab-services company, year to 31 March.

A 40% gross margin says products and services, not software: every £1 of price you concede costs them 40p of gross profit. A 6.25% operating margin says there is no slack — and gives you the leverage point: £1 of cost saved does as much for operating profit as £16 of extra revenue. That ratio, 1 ÷ operating margin, is the arithmetic behind every cost-saving pitch ever made.

Voice from the field

In What the CEO Wants You to Know, Ram Charan reduces every business — a street vendor's stall and a global corporation alike — to the same universals: cash generation, margin, velocity, growth and customers. He describes cash generation as the company's oxygen supply, and argues that growth is only worth having when margin and cash generation keep pace with it.
— Ram Charan, What the CEO Wants You to Know

Cash is not profit, and the difference decides your deal

Profit is an accounting opinion; cash is a fact. Accounts use the accruals basis — revenue and costs recorded when earned or incurred, not when money moves — so a company can be profitable and still run out of money. Same company, cash view: depreciation and amortisation of £250,000 was charged but no cash left, so EBITDA = £750,000. Then working capital moved against them — receivables +£600,000, inventory +£150,000, payables only +£100,000 — absorbing £650,000. Cash from operations ≈ £100,000; less interest and tax (£100,000 each) → −£100,000; less capex £200,000 → −£300,000.

£300,000 of reported profit; a £300,000 fall in cash. Nothing dishonest happened — growth consumed cash faster than trading generated it.

Working capital is money tied up running the business: receivables + inventory − payables. The receivables half is measured by DSO — days sales outstanding = (receivables ÷ revenue) × 365. With £1.6m of year-end receivables: (1,600,000 ÷ 8,000,000) × 365 = 73 days. So your payment terms are a real ask — if they collect in 73 days and you demand 30, you are asking them to finance you for six weeks — and billing frequency is a lever you own, since quarterly billing frequently unlocks a deal a discount would not, at far less cost to your company.

Capex versus opex — a real lever, honestly handled

Capital expenditure (capex): spend on something lasting over a year. It goes on the balance sheet and hits the P&L gradually as depreciation, from a separate, cash-limited capital budget with its own committee. Operating expenditure (opex): running cost, hitting the P&L in full now, from the revenue budget a departmental manager controls. A subscription generally sits in opex; buying kit sits in capex. Hence "can we make it opex?".

Worked example 2 — the same £300,000, two ways. Option A: buy outright for £300,000, depreciated straight-line over five years → £60,000 a year on the P&L, but a £300,000 capital approval up front. Option B: a three-year subscription at £100,000 a year → £100,000 a year on the P&L, no capital approval, but competing with staffing in the revenue budget.

Notice: Option B is worse for the annual P&L. "Make it opex" is not "make it cheaper" — it is "route it through a budget I can actually access, with an approver I can actually reach". Beginners pitch opex as a saving and buyers hear someone who doesn't understand their own proposal.

Three caveats. Leasing is no longer a free conversion: under IFRS 16, adopted across the NHS from 1 April 2022, most leases put a "right-of-use" asset on the balance sheet that scores against the capital limit. Some buyers want the opposite — capital available, revenue squeezed. And you are not their accountant: offer structures, never treatment.

Field note

"Can we make it opex?" rarely arrives as a finance question. It arrives as a delay — a meeting that doesn't get booked, a champion who suddenly needs "a bit more time internally". What has happened is that the champion discovered the ask lands in a budget they cannot reach, and has no vocabulary to say so without sounding powerless. Asking early and plainly — "which budget would this come from, and who signs off at that level?" — removes the most common silent killer in B2B deals.

2. Reading a company

Research has one job: to turn a generic pitch into a testable hypothesis about this organisation. It must answer three things — how do they make money, what is changing (change creates budget; stability rarely does), and who is under pressure, about what.

Companies House — free, via Find and update company information: directors, persons with significant control, registered charges (secured borrowing), and the full filing history with downloadable accounts. A free "follow" service emails you whenever a company files anything — the cheapest intent-monitoring available. One limit matters: small companies file abridged or "filleted" accounts, a balance sheet and notes with no profit and loss, so you often cannot see revenue for a private SME. (Reforms remove abridged accounts and require a P&L from April 2028.)

The strategic report — for a medium or large company, section 414C of the Companies Act 2006 requires a fair review of the business and a description of the principal risks and uncertainties facing the company: management stating, under legal obligation, what worries them. If your product touches one of those risks you have your opening. For a listed company add RNS announcements and analyst-call transcripts — executives repeat their priorities almost verbatim.

Job adverts — the most underrated source in B2B. An advert is budget already approved for work about to start, and it reveals direction, the tools they use and team structure.

For NHS organisations — trust board meetings are held in public under the Public Bodies (Admission to Meetings) Act 1960, and board papers are published online: the monthly finance report, integrated performance report, capital programme and risk register. A monthly briefing on your prospect's problems, published by the prospect.

Worked example 3 — forty minutes before a first call

Illustrative. You sell laboratory-informatics software; on Thursday you have a 30-minute intro call with the Head of Laboratory Operations at Wrenbury Bioanalytical Ltd, a fictional UK contract research organisation.

Companies House (12 min). Filleted accounts, so no P&L — but three years of balance sheets and employee numbers give a trend:

Also in the filing history: a charge registered in favour of a bank in FY25.

Everything else (28 min). Their site announces a second laboratory in the Midlands. Six roles are advertised, including a "Laboratory Systems Coordinator" whose advert mentions "sample tracking across multiple sites" and "spreadsheet-based reconciliation". LinkedIn shows a new Operations Director four months in, previously at a larger CRO running a proper LIMS.

Three hypotheses: a second lab breaks anything that assumed one building, and chain-of-custody is the classic failure point; spreadsheets are the current system, and they have just advertised for a human to operate them; and cash is tightening, so billing structure will matter more than price.

A balance sheet is a snapshot on one date and one year is not a trend — but it is more than enough to generate questions. Which is the point:

"Before I say anything about us — I noticed you're opening a second site and hiring a systems coordinator. When labs go from one site to two, chain-of-custody and reconciliation are usually where the cracks show first. Is that landing the same way for you, or is your pressure somewhere else?"

That proves you did work, offers a hypothesis rather than a claim, and lets them correct you. Being usefully wrong is a fine outcome; being lazily generic is not. Reciting research at a buyer ("I see you grew headcount 37% and registered a bank charge") is not impressive, it is unsettling.

Field note

Beginners read annual reports front to back and remember the wrong things — the chairman's letter, the sustainability photography, a revenue number they will never need. Experienced sellers read four: the principal risks section, the segment breakdown showing which parts are growing and shrinking, any named transformation programme with a target attached, and the outlook statement. Those are the only pages where management commits to something it can later be held to, so twenty minutes on them beats three hours elsewhere.