Check whether sales growth is shifting towards lower-margin work
Analyse changing project mix and gross contribution when turnover growth is accompanied by cash pressure.
Corporate Recovery Partners
01 / 06
The sales total can improve while contribution falls
Turnover is rising, but the business still struggles to cover its costs. Examine the type of work being won, not just the total sales number. Larger contracts may carry lower margins or require more resources. Ask the accountant to compare the underlying contribution on a consistent basis before assuming that more turnover will resolve the financial pressure.
Imagine one period with one hundred thousand dollars of sales at a twenty per cent gross margin, producing twenty thousand dollars before overheads. Another period has two hundred thousand dollars of sales at eight per cent, producing sixteen thousand dollars on the same simplified basis. Sales doubled, but gross profit fell. Real accounts need proper review, including comparable cost treatment and periods.
business.gov.au's pricing guidance recommends considering materials, labour and overheads. Ask the accountant how those costs are treated in the comparison and whether important expenses are missing or allocated differently. Do not compare a margin that excludes major delivery costs with one that includes them and call the difference a change in commercial performance.
In the example, the larger period may contain discounted contracts, more subcontracted work or projects requiring expensive materials. Review the actual jobs and supported costs. Keep forecast margins separate from completed results. An estimate made when a contract was won may no longer reflect its scope or cost to finish, so use current information and explain uncertainty.
Review when costs must be paid and when customers pay. A lower-margin contract can also require a larger advance cash commitment. Do not assume reducing one quoted price to win volume improves the business simply because staff remain busy. Assess the proposed work mix and financial capacity with advice, including existing commitments that cannot be changed unilaterally.
Discuss pricing, project selection and delivery improvements using the consistent comparison. Avoid an automatic conclusion that every large or low-percentage job should be rejected. The useful question is how the actual mix contributes to costs and cash, so growth is assessed by what it leaves the business able to do rather than by turnover alone.
