For many businesses, revenue is the number that gets the most attention.

When sales increase, the natural assumption is that the business is growing and moving in the right direction. But revenue alone tells us very little about the financial health of a business. The more important question is: What are you actually making on those sales?

Recently, while reviewing the financial performance of a business, we noticed that its gross profit margins were significantly below what we would normally expect for the industry. The business was generating revenue and remained busy, but cash flow was under constant pressure.

The problem was not a lack of sales. The problem was the margin on those sales.

Understanding Your Margin

Gross profit margin represents the portion of revenue remaining after the direct costs of generating that revenue.

For example, if a product sells for R100 and costs R70 to produce or purchase, the gross profit is R30, representing a 30% margin.

This remaining margin must still cover operating expenses such as salaries, rent and administration before the business generates a net profit. Even a small movement in gross margin can therefore have a significant impact on overall profitability.

Is Your Margin Accurate?

A margin is only meaningful if the underlying costs are correctly identified and allocated.

While most businesses understand their selling price, the true cost of delivering a product or service is often less clear. Labour, freight, packaging, subcontractors and other direct costs may be incorrectly classified or allocated across products, services or divisions.

If these costs are not accurately reflected, the reported gross profit margin can be misleading, potentially resulting in products or services being sold at a loss without management realising it.

Know Your Number

There may be valid strategic reasons to operate at a lower margin, such as entering a new market or securing a key customer. However, there is a significant difference between choosing a lower margin and simply not knowing what your margin should be.

Margins should be measured against historical performance and, where relevant, industry benchmarks. They should also be understood across individual products, services or divisions, because your highest-selling offering is not always your most profitable.

Turnover Alone Is Not Enough

Increasing sales will not necessarily solve a profitability or cash flow problem.

If margins are too low, higher sales can place even greater pressure on cash flow by increasing stock, labour and working capital requirements without generating sufficient profit.

Effective financial management therefore goes beyond measuring revenue. It requires a clear understanding of what each sale actually contributes to the business.

At wauFM, we believe sustainable growth starts with understanding not only how much you sell, but how much you make when you sell it.

Turnover measures activity. Margin measures whether that activity creates value.