Almost every business owner asks this question at some point. He puts last year’s numbers next to this year’s and says the same thing: my sales have gone up, so why is my profit down? It sounds impossible. More sales should mean more money. But the profit is lower, and nobody in the business can say exactly why.
The good news is that there is almost always a clear reason. Sales and profit are not the same thing, and as a business grows, they can slowly move apart. A CA does not guess. He checks a few things one by one until the real reason comes out. Here is how that is done, in plain terms.
Sales and profit are not the same thing
Sales is the money coming in. Profit is what is left after you pay for everything: the goods, the discounts, the salaries, the rent, the transport, and the loan interest. Sales is the money that comes in the front door. Profit is the little that stays back after everything else has gone out the back door.
When your sales go up, all your costs are moving too. So it is fully possible to sell more and keep less. That is why a CA stops looking at the sales figure and starts looking at what happens in between.
How a CA finds the real reason
Instead of checking everything at once, a CA looks at four things, one after the other.
One: are you earning less on each sale?
Take one product. Say last year you bought a fan for 1,000 rupees and sold it for 1,200. You made 200 on it. This year, to sell more, you gave a discount and sold the same fan for 1,120. Now you make only 120 on it. You may have sold many more fans, but you kept less on each one. Sell enough of them at the lower amount, and your total profit can actually fall, even though your sales went up. This is the most common reason, and it is easy to miss, because the sales look bigger than ever.
Two: have your running costs gone up?
If you are still earning the same on each sale, the CA looks at your regular expenses. As a business grows, it quietly adds things: one more salesman, a bigger godown, a new delivery van, a larger loan with more interest. If these go up faster than your sales, your profit falls even when each sale is as good as before. Usually nobody decided to spend more. The costs just crept up slowly, one small step at a time.
Three: is the money stuck, not lost?
Sometimes the profit has not fallen at all. It is the cash that has fallen, and that feels like a loss. When you sell more, you also keep more stock in the godown, and more customers owe you money. So the profit is there in the books, but the money is stuck in stock and in customer dues. The business is doing fine on paper and still feels tight. So a CA asks a simple question early: is the profit missing, or is the cash missing? The two need very different answers.
Four: is money leaking out?
If the first three do not fully explain it, the CA looks for leakage: profit quietly lost through weak checks, stock differences, loose discounts and purchases nobody verifies. That is a big topic on its own, and we have written separately about where profit leaks in trading and distribution businesses. For many businesses, this is the last piece that explains the missing profit.
Why this happens more as you grow
There is a reason this shows up just when business is good. When you were small, a small mistake cost you a small amount. Now that you are bigger, the same small mistake costs you much more. A tiny drop in profit on each sale is nothing on a small business. On double the sales, it becomes a big number. The old way of running things starts to strain, and profit slips through the gaps.
Two simple checks you can do
Before calling anyone, you can do two quick checks yourself.
- Check one product. Take one main product. Work out how much you made on one piece last year, and how much you make on one piece today. If it has come down, you are earning less on each sale, and that is your main problem.
- Profit or cash? Ask yourself: is the profit missing, or is the cash missing? If your books show profit but there is never enough money in the bank, then the money is stuck in stock and dues, not lost.
In short
Most owners look for one single reason. There usually is not one. Falling profit on rising sales is normally a little of everything: earning less on each sale, higher running costs, money stuck in stock and dues, and some quiet leakage. A proper check, such as checking where profit is leaking, works out how much each one is costing you, so you know what to fix first.
Growing sales are a good thing. But more sales is only a chance to make more profit, not the profit itself. The owners who keep both going up together are simply the ones who keep asking, again and again, what is happening in the gap between the two.
If your sales are going up but your profit is not, and you would like help understanding why, you can speak to the team at Agarwal Ajay & Co.