Sales Are Growing but Profit Is Falling: Choose Future Work on More Than Revenue

Sales are above last year’s level. The team is busy. Yet profit has fallen. Before asking sales to sell more, look at what the extra work contains.

There is no need to conclude immediately that growth was a mistake. Did input costs rise? Did spending on future capacity increase? Did the mix shift toward less profitable work? Separate those possibilities before deciding what to pursue next.

Which profit measure fell?

J-Net21, operated by Japan’s Organization for Small & Medium Enterprises and Regional Innovation, explains gross profit as sales minus cost of sales, and operating profit as that amount minus selling, general and administrative expenses.[1] Agree with your accounting team on the measure, comparison period and treatment of costs.

Compare sales, cost of sales, gross profit, selling, general and administrative expenses, and operating profit with the same period last year. If the business is seasonal, a comparison with the previous month alone is insufficient. Look at gross profit in money and gross margin separately: a lower margin does not necessarily mean less gross profit.

An increase in expenses associated with a new location or recruitment calls for a different decision from weaker profitability in existing work. Distinguish equipment purchases from expenses recognized during the period. Profit and cash also need separate attention. Track expected receipts and payments when work requires spending before the customer pays.

Do not treat all additional work as equivalent

The following is a practical proposal for reviewing your own records. Group completed work with comparable uses and service scope. Record sales, costs, time, rework and outsourced activity. Keep estimates separate from actual results.

Ask whether costs for comparable work rose; whether prices, quantities or delivery terms changed; and whether the share of demanding work increased.

Use a consistent allocation method when comparing job costs. If you convert working time into cost, do not deduct labor already included in job costs or allocated expenses again. Keep time records separately and distinguish accounting profit from internal comparison measures. Allocating company-wide expenses to an order does not mean declining that order will remove the same amount of spending.

Without that distinction, you could keep prioritizing large orders or abandon work needed for the company’s future too quickly.

What the customer values and what the company carries

When work appears less profitable, ask what the customer values before choosing between a higher price and withdrawal. Does the effort create needed value, or does it arise from unclear explanations and internal rework?

For valued work, consider price, scope, lead time and delivery processes together. For activity that appears unvalued, investigate whether it can be removed. A customer’s failure to mention an activity is not enough reason to eliminate a process that supports quality.

Deciding what a fee includes deals with extra work. Here the question is broader: which kinds of work are growing across the business?

This is where brand strategy belongs. Whose problem should the company serve, and which orders and capabilities should grow so it can keep delivering that value? Before adding language intended to justify a higher price, connect customer value with a viable business choice.

Make one decision about future orders

Work that supports future investment should not be rejected on current gross profit alone. If management accepts a loss or added workload, record what it expects to gain, for how long and within what limit.

Start with one service rather than changing every customer’s terms. Test new quotation conditions or sales priorities. Assign an owner, a trial period, a spending limit and a review date.

Track actual costs, delivery demands, gross profit and customers’ reasons for accepting the terms, alongside orders and sales. Better-looking figures do not justify continuing if quality or delivery becomes unreliable. Do not change existing contractual terms unilaterally on the basis of an internal policy.

A few jobs are not enough to determine company-wide policy. Job profitability depends on allocations and estimates. If a cash shortage is imminent, involve lenders or financial specialists first.

HUV DESIGN OFFICE’s individual assessment and strategy services connect target customers and value propositions with profitability and delivery capabilities. Dependence on a major customer concerns concentration; this article concerns the mix of work to grow.

Source

[1] Organization for Small & Medium Enterprises and Regional Innovation, Japan, J-Net21, “How to Write a Profit and Loss Plan” (Japanese-language guidance for startup planning; gross and operating profit formulas. It is not research validating the order-selection method proposed here. Accessed October 10, 2026.) https://j-net21.smrj.go.jp/startup/manual/list5/5-2-8.html

Author: Daisuke Irikura, Representative Director, HUV DESIGN OFFICE Co., Ltd.