Sales are growing. Why is profit falling?

Imagine a distributor that sold LKR 10 million last quarter at a 20% gross margin. That left LKR 2 million in gross profit. This quarter, sales rose to LKR 12 million, but the mix shifted towards discounted equipment. At a 15% margin, gross profit fell to LKR 1.8 million. The sales team delivered 20% more revenue, yet the business had LKR 200,000 less to cover its operating costs.

Which sales changed the result?

I would start with a breakdown by product and customer. Did the same products sell for less? Did purchase costs rise? Or did a larger share of sales come from lower-margin products? Each answer points to a different conversation. A change in mix calls for a look at the sales pipeline. A price concession calls for a closer look at the deal.

What did we commit to deliver?

Take one order and compare the original costing with what it took to fulfil it. Freight, installation visits or extended support can make a difference. Check which costs already sit in gross profit before deducting any further costs to assess the order’s contribution.

What should change before the next quote?

If the extra cost came from repeat site visits, the next proposal could specify how many visits the price includes. If freight caused the variance, procurement could confirm the delivery quote before sales finalises its price. Those are decisions a team can act on while the next order is still being negotiated.

The figures in this example are illustrative.