Been working with a business where GP% is sliding. First reaction? “It’s the economy.” Fair enough—it’s been rough. But blaming the market only gets you so far. If your gross profit is falling, it’s time to ask tougher questions.
Here’s what to look for—and how to get your margins back on track.
Let’s Start With the Basics
GP% = (Revenue – Cost of Goods Sold) / Revenue.
If revenue drops but your costs don’t, your GP% will shrink. But not every drop is economic. The real question is: why haven’t your costs adjusted with your sales?
What’s Really Going On?
Here are the main culprits we’re seeing—and what to do about each:
1. Wages Are Static (But Sales Aren’t)
You don’t want to lay people off. Fair. But if your wage bill’s not shifting, and you’re making fewer sales, your costs per unit are blowing out.
Check: Are you allocating wages correctly? Some roles might belong in overheads, not COGS.
Action: Revisit your chart of accounts and see if your costing reflects reality.
2. COGS Hasn’t Budged
Materials, supplier pricing, freight—have they actually changed? Or are you still buying like it’s 2022?
Check: Compare supplier costs and order volumes over the past year.
Action: Renegotiate terms, explore alternate suppliers, tighten up purchase orders.
3. Discounting Without a Plan
Quick sales fixes often mean big GP pain. Discounting can erode value if you don’t track its impact.
Check: Are discount-heavy months killing your margin?
Action: Build a model that shows the GP impact of each promo. Stop discounting unless it’s strategic.
4. Product or Service Mix Shift
Selling more of the low-margin stuff? That’ll do it.
Check: Break your sales and GP down by product or service line.
Action: Shift your marketing or sales energy to high-margin items. Cull what’s not working.
5. Shrinkage or Theft
Uncomfortable topic, but real. If stock is walking, you’re losing margin—fast.
Check: Are stocktake results matching what your system says?
Action: Improve stock control, install basic monitoring, and build a culture of accountability.
6. Costing Is Out of Date
You’re charging based on last year’s costs—but inputs have changed.
Check: When did you last review your cost models?
Action: Rebuild them quarterly. Add margin buffers where volatility’s high.
7. Operational Drag
Same output, more effort? That’s a GP killer.
Check: Time or cost per unit over time—going up?
Action: Streamline delivery. Fix bottlenecks. Automate where you can.
A Forward Look
Economic pressure is real—but strong businesses adjust. GP% is a signal. Don’t ignore it. Track it monthly, dig into the “why,” and act quickly.
Margins don’t just protect your business. They buy you time, stability, and space to grow—on your terms.
Curious what your GP% is hiding? Let’s take a look together. There could be smarter moves within reach.
