Revenue growth should not be assessed in isolation.
A business may report higher sales while its gross-profit margin deteriorates.
Consider a simple example:
- Sales increase from RM100,000 to RM120,000
- Gross profit remains unchanged at RM30,000
- Gross-profit margin declines from 30% to 25%
The business processed more sales without generating additional gross profit.
Management should investigate:
- Changes in purchase, production or service-delivery costs
- Whether selling prices reflect current costs
- Discounts and credit notes
- Wastage, rework or operational inefficiencies
- Changes in the product, customer or service mix
Tracking both gross-profit value and percentage helps management identify margin leakage before it becomes a larger profitability problem.