What to check when turnover is up but profit is down
When sales grow and profit falls, the cause sits in margin, prices, payroll or overheads, and the management accounts show which. These six checks find it. Business Pulse, Buzz’s advisory service, runs them with you every month or quarter and turns the answer into decisions.
Run by Andy Jackson and Peter Allen · AAT licensed · ICPA member · FreeAgent and Xero partner
Six checks when profit falls while sales rise
Gross margin by product, customer or job type
One overall margin can hide a growing line that earns less. Split sales and direct costs by type and compare each margin with last year.
Prices against costs
List the supplier and material increases since you last changed your prices. Any increase you absorbed comes straight off gross profit.
Discounts and credit notes
Add up discounts, free delivery, credit notes and write-offs for the year. Compare the total with last year as a percentage of sales.
Payroll and subcontractors
Compare the growth in wages, employer National Insurance, pensions and subcontractor costs with the growth in sales. Extra hours and new hires show here.
Overheads that stepped up
A new vehicle, premises, software or a manager adds a fixed cost every month. Check whether sales grew enough to carry it.
The bookkeeping itself
Stock not counted at the year end, costs posted to the wrong month, or a missing accrual can move profit between years. Confirm the figures before acting on them.
A coffee roaster that grew by £76,000 and made less
An independent coffee roaster sells bags online and roasts for cafés. Sales rose from £410,000 to £486,000 in a year, and operating profit fell from £61,800 to £51,440.
Wholesale sales to cafés grew from £150,000 to £236,000. Green coffee prices rose during the year and wholesale prices stayed fixed, so the wholesale margin fell from 34% to 29%. Online sales dipped from £260,000 to £250,000 at a steady 58%. A van and a part-time driver for the café rounds added £22,000 to overheads.
From last year’s profit to this year’s
An illustrative example. The business is not a real client and every figure is invented.
The decisions that came out of the review
The owner raised wholesale prices by 8% from the next quarter, in line with the rise in green coffee. On £236,000 of wholesale sales that is worth £18,880 a year.
Café deliveries now have a minimum order of 10kg, with smaller orders sent by courier at the café’s cost. The budget for next year carries both changes, and the quarterly review tracks the wholesale margin as a KPI.
With Business Pulse, this split by sales type and the bridge from one year’s profit to the next are part of the management accounts. Quarterly from £299 + VAT a month, or monthly from £499, including your year-end accounts and tax returns. How Business Pulse works.
Questions about falling profit
Why is my profit down when my turnover is up?
The extra sales earned a lower margin, prices fell behind costs, payroll or subcontractors grew faster than sales, or overheads stepped up. Errors in the bookkeeping, such as stock or costs in the wrong year, can also move profit. Management accounts split by sales type show which.
What is gross margin?
Sales less the direct cost of those sales, such as materials, stock and subcontractors, as a percentage of sales. On £100 of sales with £60 of direct costs, the gross margin is 40%.
Can you look at last year’s figures once?
Yes. A one-off review of your figures is available on its own. Book a call and we will price it. Business Pulse repeats the check every month or quarter.
Do I need management accounts for this?
Yes. Your year-end accounts show the total. Management accounts split by product, customer or job type show where the margin changed and when.
Talk to us about Business Pulse
Tell us about the business and what you need. A named person replies within one working day.
