Your Sales Haven’t Collapsed — So Why Is Your Profit Margin Disappearing?
- Future Accounting
- 10 hours ago
- 5 min read
Written by: Melissa Cunliffe (CA)
If customers are still buying and your team is still busy, why does it feel like there’s less money left at the end of every month?
That may be one of the most important questions Australian family-business owners ask this year.
NAB’s latest business survey points to an uncomfortable combination: business conditions have shown some resilience, but confidence remains weak while labour and purchasing costs continue placing pressure on businesses.
In other words:
The problem isn’t necessarily that businesses have stopped selling.
For many, it’s that the cost of making those sales has increased. That’s called margin compression. And it can quietly turn a growing business into a less profitable one.
Sales can rise while profit falls
Consider a family business that last year generated:
Sales: $2,000,000
Net profit: $200,000
That’s a 10% net-profit margin.
This year, sales increase 7.5% to:
$2,150,000
Sounds like a good year. But wages increased. Super increased. Insurance increased. Suppliers increased their prices. Electricity increased. Finance costs increased. Software increased. And the business didn’t fully adjust its pricing.
Net profit falls to:
$150,000.
The business sold $150,000 more…
…but made $50,000 less.
That’s the danger of focusing on turnover.
Turnover isn’t prosperity
Revenue is important. But it isn’t the end result. Imagine running a marathon where the finish line keeps moving further away. That’s what margin compression can feel like. You employ more people. Buy more stock. Complete more jobs. Send more invoices.
Carry more debtors. Take more risk.
And after all of that… you make less money. That’s not sustainable growth.
Why Your Profit Margin Is Disappearing
For many businesses, there isn’t one enormous problem. It’s ten small increases. Wages rise 4%. Insurance rises 10%. A supplier adds 5%. Merchant fees continue. Software subscriptions increase. Fuel moves. Electricity moves. Finance costs rise. Superannuation increases.
And perhaps your prices increase only 3%. Each increase appears manageable individually. Together, they can materially change the economics of your business.
When did you last calculate your gross margin?
Many business owners know their annual turnover almost instantly. Ask them their gross-profit percentage and the answer is often less certain. But margin can be more important than turnover. Suppose you sell something for $100 that costs $60 to deliver. You have $40 left before overheads.
If that cost increases to $65 and you leave the selling price at $100, you’ve lost $5 of gross profit. Your sales haven’t changed. Your customer hasn’t noticed anything. Your bank account eventually will.
Don’t automatically blame wages
Labour is a significant cost for many businesses, but simply cutting employees isn’t necessarily the answer.
The better questions include:
Are we pricing labour correctly?
Are employees spending enough time on productive work?
Is overtime profitable?
Are jobs being quoted accurately?
Are we recovering supervision and administration?
Could technology remove low-value work?
Are we measuring revenue or gross profit per employee?
The objective isn’t necessarily fewer people. It’s better productivity from the resources you’re already paying for.
Your biggest customer might be costing you money
Revenue can also disguise unprofitable customers.
A large customer may demand:
discounts;
longer payment terms;
urgent work;
custom reporting;
frequent rework; and
significant management time.
A smaller customer paying full price within seven days may actually generate considerably more profit.
So don’t only ask:
“Who are our biggest customers?”
Ask:
“Who are our most profitable customers?”
Then comes cash
Even if profit improves, cash can still disappear. Why? Because profit and cash aren’t the same thing.
Cash can become trapped in:
debtors;
inventory;
work in progress;
equipment;
loan repayments; and
tax obligations.
That’s why at 3P’s Future Accounting, we want owners to understand three numbers:
Revenue — what did we sell?
Profit — what did we make?
Cash — what did we actually keep and where did it go?
A business owner who understands all three makes very different decisions from one who watches turnover alone.
Preserve. Protect. Prosper.
This is where our 3P’s Future Prosperity Model becomes practical.
PRESERVE
Preserve the wealth the business has already created.
Don’t allow inflation, inefficient processes or uncontrolled overheads to quietly consume years of hard work.
Growth that requires continually increasing debt or personal funding may not be creating wealth at all.
PROTECT
Protect your margin. Know your break-even point. Review pricing. Monitor wages.
Understand which products, jobs and customers actually make money.
PROSPER
Prosper through profitable growth.
That means focusing on:
margin rather than turnover alone;
productivity rather than simply headcount;
profitable customers rather than the largest customers;
cash conversion rather than invoicing alone; and
return on investment rather than activity.
Seven numbers every family business should review
At least monthly, know:
Revenue
Gross-profit dollars
Gross-profit percentage
Wage percentage
Net profit
Debtor days
Operating cash flow
Then compare them against last year and against budget. Trends matter. If revenue rises while gross margin and cash flow decline, investigate before the problem becomes serious.
The 3P’s view
The latest business data reinforces something we’ve been discussing with family businesses for some time:
Being busy and being profitable are not the same thing.
You cannot control every supplier increase.
You cannot control interest rates.
You cannot control inflation.
But you can control how quickly your business responds.
Sometimes the solution is increasing prices.
Sometimes it’s improving productivity.
Sometimes it’s renegotiating suppliers.
Sometimes it’s changing customer mix.
And occasionally it’s deciding that a particular product, service or customer simply isn’t worth pursuing.
At 3P’s Future Accounting, our objective isn’t simply helping clients report what happened last year.
It’s helping them understand what’s happening now, while there’s still time to do something about it.
That’s how we help businesses:
Preserve. Protect. Prosper.
So here’s the question to take into your next management meeting:
If sales are up, are we actually keeping more?
If the answer is no, it’s time to find out why.
Book a conversation with the team and take the next step towards Preserve. Protect. Prosper.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
