Can More Sales Fix a Bad Business Margin in Australia?

By Sonja Pfitz

More sales will not fix a poor business margin if every additional sale delivers too little profit or creates costs the business has not properly measured. Owners focus on revenue because it is visible, but turnover can rise while profit falls, and chasing more sales can enlarge the underlying problem.

Why Can Sales Increase While Profit Falls?

Revenue and profit are not the same thing. Imagine a business that grows from $10 million to $12 million in annual sales. On the surface that looks like strong growth, but the cost of materials, wages, freight, overtime, insurance, electricity, rent and supplier pricing may all have moved over the same period. If those costs rose faster than the profit earned on the extra sales, the business has grown its turnover while weakening its profitability, so sales growth alone says very little about whether the business is improving.

The current environment makes this more likely. NAB's August 2026 Business Survey (NAB) found purchase costs rising 2.3 per cent over the quarter while product prices rose only 0.8 per cent, with its profitability index falling 10 points to a post-COVID low. NAB's head of Australian economics said cost growth has been running well ahead of price growth for almost six months. When costs rise faster than selling prices, each additional sale can carry a thinner margin than the business previously earned.

What Is Gross Margin and Why Does It Matter?

Gross margin shows how much of each sales dollar remains after the direct cost of producing or acquiring what you sell, which makes it one of the most useful numbers in a business. For example, a business generating $10 million in revenue at a 30 per cent gross margin earns $3 million in gross profit. If revenue rises to $12 million but gross margin falls to 24 per cent, gross profit drops to $2.88 million. That means the business has generated an extra $2 million in sales but is left with $120,000 less gross profit than before. That is easy to miss when attention stays on turnover, which is why it pays to track your gross profit margin every month.

You do not need hundreds of reports to keep watch. Start with sales, gross profit, gross margin percentage and operating profit, then look at the direction they are moving. Useful questions include whether revenue is rising while gross margin falls, whether labour costs are outpacing sales, whether freight and delivery costs are climbing and whether discounting is becoming more common. A single weak month may mean little, but a margin that has been declining for six months deserves attention.

How Do Cost Creep and Discounting Reduce Business Margin?

Margin pressure rarely arrives as one large expense. A supplier lifts pricing, freight rises, insurance renews at a higher rate, wages move up, more overtime becomes necessary and customers push for stronger discounts. Each change looks manageable on its own, but together they can take several percentage points out of margin. The difficulty is timing, costs can rise today while customer prices may not move for months, and the business absorbs the difference in the meantime.

Discounts often look smaller than they really are. Suppose a product sells for $100 and costs $70 to provide, leaving $30 in gross profit. A 10 per cent discount drops the price to $90 and the gross profit to $20, so the customer receives a 10 per cent discount while the business gives up one third of its gross profit. To earn the same total profit at the discounted price, the business would need to sell 50 per cent more units. Discounting can still make sense for volume, important long-term relationships or clearing old stock, provided the decision rests on the real impact on margin.

Waiting until margin pressure becomes severe makes a price increase harder, yet owners often hold back because they fear losing customers. Before a blanket increase, it is worth finding where the pressure actually sits, because one product line may have become unprofitable, one customer group may be heavily discounted or one contract may have been priced on assumptions that no longer hold. Correcting those areas can recover margin without touching the rest of the business.

Can a Big Customer Actually Reduce Your Profit?

Yes, because some large customers cost more to serve than their sales suggest. They may demand special pricing, frequent small deliveries, urgent freight, extra reporting, longer payment terms or constant changes to orders, and those costs rarely appear beside the customer's name. The business sees the revenue without seeing everything required to generate it, which is why customer profitability can be more informative than customer turnover. Longer payment terms add a further cost through the credit exposure they create, as covered in Would You Still Give That Customer 30-Day Terms Today?

Should You Ever Walk Away From Revenue?

Yes, when the overall return no longer makes sense. There may be good reasons to keep a low-margin customer or contract, and that can be a valid decision as long as it is made deliberately. The danger is assuming every dollar of revenue is equally valuable. When profitability is under pressure, "sell more" should not be the automatic answer, because better results often come from improving pricing, reducing waste, renegotiating supply, changing service levels or declining work that no longer makes commercial sense. The question that matters is how much the business actually keeps from each additional dollar it sells.

I have spent more than 30 years as a commercial finance broker and business consultant, including senior credit and risk roles inside major financial institutions. If you would like a second opinion on your margins, pricing or the cashflow effect of growth, contact Pfitz Financial or book a free confidential appointment.