Why Is My Turnover Growing but My Profit Isn’t? 7 Places to Look First

Short Answer

If your turnover is growing but your profit isn't, the extra sales are being absorbed somewhere between the top and bottom of your profit and loss account. Common causes include falling gross margins, prices failing to keep pace with costs, selling more low-margin work, increasing overheads, inefficient delivery, additional growth costs and simply not knowing which customers or jobs actually make you money. Before chasing even more sales, work out where the additional revenue is disappearing. Because more turnover does not automatically mean a better business.

“We're busier than ever. So where's the money?”

It's a conversation we regularly have with established business owners.

Sales are up.

The team has grown.

There are more customers.

Everyone seems incredibly busy.

Yet when the accounts arrive, profit has barely moved.

Sometimes it's actually fallen.

That can be incredibly frustrating because everything on the surface suggests the business is growing.

And technically, turnover may well be growing.

But turnover and profit are not the same thing.

Turnover tells you how much you've sold.

Profit tells you how much of it you've managed to keep.

And it's entirely possible to build a bigger business that makes less money.

So before celebrating another record sales month, there are seven places I'd look.

1. Have your prices kept pace with your costs?

This is one of the simplest places to start.

Your wages have increased.

Materials cost more.

Insurance has gone up.

Vehicles cost more to run.

Software subscriptions creep upwards.

Suppliers increase their prices.

But when did you last properly review yours?

A business can increase sales significantly while quietly giving away margin because its selling prices haven't kept pace with its costs.

And the effect compounds.

Imagine something costs you £70 to deliver and you sell it for £100.

Your gross profit is £30.

If your delivery cost rises to £80 but you leave your price at £100, you've lost a third of that gross profit.

You now have to sell considerably more simply to stand still.

What should you check?

Look at your major products or services.

Compare what they cost you to deliver now with what they cost 12–24 months ago.

Then compare that with your selling price.

Don't just ask:

“Have we put our prices up?”

Ask:

“Have our prices increased enough?”

Those are very different questions.

2. Has your gross margin slipped?

Turnover gets a lot of attention because it's easy to talk about.

“We're a £1 million business.”

“We've just hit £2 million.”

“We grew 20% last year.”

All potentially impressive.

But what happened to gross margin?

Your gross margin tells you how much of each pound of sales remains after the direct costs of delivering what you've sold.

And small percentage changes can have a big impact.

Consider this deliberately simplified example:

Sales have grown by £200,000.

Everyone might be celebrating 20% growth.

But only another £10,000 of gross profit has been created.

Then the larger business requires more overhead to operate.

The result?

The business is substantially bigger but produces less than half the operating profit.

That's why turnover alone can be such a misleading measure of success.

What should you check?

Compare your gross margin percentage:

• this month against the same month last year;
• this quarter against last year;
• this year against the previous year.

If sales are rising while gross margin percentage is falling, investigate why.

Something has changed.

3. Are you selling more of the wrong work?

Not all turnover is equal.

This is particularly important in service, construction, trades, hospitality and B2B businesses.

You might have:

• one service with excellent margins;
• another that's incredibly labour-intensive;
• a large customer who continually negotiates discounts;
• certain jobs with significant travel or management time;
• products that look profitable until all their true costs are included.

Then growth arrives predominantly from the least profitable part of the business.

Turnover goes up.

Workload goes up.

Profit barely changes.

This is why “more customers” isn't necessarily a useful objective.

You want more of the right customers buying the right things at the right price.

What should you check?

Break your sales down by:

• customer;
• product;
• service;
• job type;
• division;
• location;
• or whatever makes sense for your business.

Then ask:

Where are we actually making our money?

You may discover that the part of the business everyone is proudest of is contributing remarkably little profit.

4. Have your overheads grown faster than the business?

Growth often creates overhead.

Another manager.

An administrator.

Larger premises.

More vehicles.

More software.

Additional insurance.

Recruitment.

Marketing.

Professional fees.

None of those costs are automatically bad.

In fact, many may be essential if the business is going to grow.

The problem arises when the additional cost becomes permanent but the expected additional profit never arrives.

Perhaps you hired ahead of growth that didn't materialise.

Maybe the larger premises were necessary at £2 million turnover but you're still at £1.4 million.

Or you've accumulated dozens of individual costs that seemed insignificant on their own but collectively have become substantial.

What should you check?

Compare total overheads as both:

£ value

and

percentage of turnover

against previous periods.

Then go through your overheads line by line.

Don't immediately start cutting everything.

Ask instead:

What value is this cost supposed to create?

Then:

Is it?

There is a difference between investment and expense.

But investment still needs to produce something.

5. Is inefficiency eating the profit?

Sometimes your pricing is fine.

Your customers are fine.

Your headline gross margin should be fine.

But actually delivering the work costs far more than you expected.

Jobs run over.

Teams go back to correct mistakes.

Materials get wasted.

People sit waiting.

Overtime becomes normal.

Projects are poorly scheduled.

Work isn't invoiced promptly.

Customers change the scope and nobody charges for it.

The quote may have been profitable.

The job wasn't.

This is particularly dangerous because many businesses don't measure the difference.

They know what they expected the job to make.

They don't know what it actually made.

What should you check?

Take ten recently completed jobs, projects or customers.

Compare:

Quoted/expected cost

with

Actual cost

Then look for recurring differences.

Labour?

Materials?

Subcontractors?

Travel?

Rework?

Scope creep?

Poor estimating?

One mistake may be unfortunate.

The same mistake appearing repeatedly is a system problem.

6. Are you paying for growth before the growth pays you back?

Growing businesses often have to invest before they receive the return.

You recruit somebody today.

They may not become fully productive for months.

You take larger premises before you fill the available capacity.

You increase marketing spend before the new customers arrive.

You buy equipment before it generates revenue.

That doesn't necessarily mean the decision was wrong.

It means you need to understand the lag.

The danger is adding several layers of cost on the assumption that continued growth will eventually justify them.

Ask three questions:

What additional cost have we deliberately taken on to enable growth?

What additional gross profit was that investment supposed to create?

Has it happened yet?

If not, decide whether:

• it simply needs more time;
• implementation hasn't worked;
• the assumption was wrong;
• or something needs changing.

Good growth investment should eventually create capacity or performance.

It shouldn't disappear permanently into “that's just our overhead now”.

7. Do you actually know where the profit comes from?

This may be the biggest question.

Ask an owner:

“Which customers are your most profitable?”

and they'll often tell you who spends the most.

That's not necessarily the same answer.

Ask:

“Which service gives you your best margin?”

and sometimes you'll get:

“I think it's…”

That word think is doing a lot of work.

Established businesses eventually become too complicated to run entirely on feel.

That doesn't mean producing hundreds of reports.

It means knowing enough numbers to make sensible decisions.

At minimum, I would want an owner to have regular visibility of:

• turnover;
• gross profit;
• gross margin percentage;
• overheads;
• operating/net profit using a consistent measure;
• profit margin;
• and cash.

Then you can go deeper where necessary.

By customer.

By product.

By service.

By project.

By team.

By salesperson.

The purpose isn't to become an accountant.

It's to be able to ask better questions.

One important distinction: profit isn't the same as cash

There's another version of this conversation:

“The accounts say we're profitable, but there's never any money in the bank.”

That's related — but it's a different problem.

A profitable company can still be short of cash because money is tied up in debtors, stock, work in progress, loan repayments, capital expenditure or simply because customers pay long after the business has paid its own costs.

So establish what you're actually experiencing.

If turnover is increasing but profit isn't:

Investigate margin and costs.

If profit is increasing but cash isn't:

Investigate cash flow and working capital.

You need to understand both.

A profitable business can run into serious trouble if it cannot meet its cash commitments, so don't assume that a healthy-looking P&L removes the need to manage cash carefully.

The 30-minute profit check

If your turnover has increased but you can't see the benefit, do this.

Take your latest rolling 12 months and compare it with the previous 12 months.

Write down:

1. Turnover

Has it increased?

By how much?

2. Gross profit

Has the actual £ value increased?

3. Gross margin %

Has it improved, stayed steady or fallen?

4. Overheads

How much have they increased?

Which increases were deliberate?

5. Operating or net profit

Use the same consistent measure each period.

Has it actually improved?

6. Profit margin %

What proportion of sales are you ultimately retaining?

7. Cash

What's happened to the bank position and working capital during the same period?

Now look across the numbers.

You aren't trying to perform an audit.

You're looking for the point where the improvement in turnover disappears.

That's where the next question begins.

Don't start with “How do we sell more?”

This is the important bit.

When profit disappoints, the instinctive response is often:

“We need more sales.”

Sometimes you do.

But imagine your current sales create a 3% profit margin because the pricing, delivery or cost structure is wrong.

Doubling down on sales could simply double down on the problem.

More turnover can create more:

• employees;
• complexity;
• cash requirement;
• vehicles;
• management;
• customer problems;
• risk.

Before trying to make the business bigger, make sure the economics work.

Sometimes improving margin on the turnover you already have is substantially more valuable than chasing another chunk of revenue.

What should you tackle first?

Don't try to fix seven things simultaneously.

Find the biggest leak.

If pricing is the issue, review pricing.

If one type of work is destroying margin, understand why.

If overhead has run ahead of growth, challenge it.

If jobs are regularly overrunning, investigate delivery.

If nobody can tell you which customers are actually profitable, fix the management information.

Choose the issue with the greatest potential impact and put a number against the improvement you want.

For example:

Current gross margin: 28%

Target gross margin: 31%

Then decide:

What needs to change?

Who owns it?

When will it happen?

How frequently will we measure it?

That turns “we need to make more profit” into something people can actually work on.

Turnover isn't the goal

A £3 million business is not automatically better than a £2 million business.

A £10 million business isn't automatically better than a £5 million one.

The better business is the one that delivers what its owners want from it.

That might include growth.

But it should probably also include some combination of:

profit,

cash,

security,

a capable team,

time,

reduced owner dependency,

and eventually value.

Turnover is useful.

But it is only one number.

So if your business is getting bigger but you're wondering why you don't feel any better off, don't immediately chase another sales target.

Ask:

Where is the profit going?

Then follow the numbers until you find the answer.

Key Takeaways

• Higher turnover does not automatically mean higher profit.
• Start by comparing gross margin percentage, not just sales.
• Check whether selling prices have kept pace with your direct costs.
• More sales of low-margin work can make the business busier without making it better.
• Review overhead growth and whether additional costs are producing the expected return.
• Compare expected job profitability with actual results to expose waste, rework and scope creep.
• Separate a profitability problem from a cash-flow problem.
• Find the largest profit leak and address that first rather than simply chasing more sales.

Is profit the real constraint in your business?

If the business is busy and growing but the financial results aren't following, profit may be the symptom rather than the underlying problem. The Chip25 Business Constraint Scorecard helps established business owners look at six areas — market, capacity, cash, skills, systems and owner dependency — to identify what deserves attention first. Or book a Business Growth Call if you'd value an independent look at what the numbers may be telling you.

• Take the Business Constraint Scorecard
• Book a Business Growth Call

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