More Sales but Less Profit? Here’s How to Find Out Why

You can be busier than ever, watch your sales climb, and still end up with less in the bank at the end of the month.

We see it all the time. More revenue, thinner margins, and no obvious reason why.

The good news? Your profit and loss statement already knows where the money’s going. You just have to read it in percentages, not dollars.

Dollars hide problems. Percentages expose them.

When you look at your P&L in dollars, everything looks like it’s growing. Revenue’s up. Expenses are up too, but so what, the business is bigger now.

Percentages tell a different story. If your marketing spend was 8% of revenue last year and it’s 14% now, that’s not “the business growing.” That’s a leak.

This is what accountants call a common-size P&L. Every line becomes a percentage of revenue instead of a dollar figure, so you can actually compare periods, spot trends, and catch problems before they eat your profit.
When you combine this with Xero tracking categories, you can slice your business by segment and review the profitability of each arm of your business. But you’re fine to use this method to review your whole business at once – what percentage of every dollar is each cost eating, and how much profit is actually left when the dust settles.

Once you’ve got target vs actual side by side, the gaps tell you exactly where to look.

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Step 1: Decide the profit you want first

Most business owners work out their profit margin backwards. Revenue minus expenses equals whatever’s left, and that’s “the profit.”

Flip it. Decide your target profit margin before you look at a single expense.

Around 20% is a common starting point, but the right number depends on your industry. A café and a consulting firm are not chasing the same margin, and that’s fine. The point is picking a number and holding your business to it, rather than accepting whatever falls out the bottom.

Reach out if you need guidance for your industry.

Step 2: Turn every expense into a percentage of revenue

Once you’ve got your profit target, everything else has to fit around it. Your profit target plus every expense category has to add up to 100% of revenue. If it doesn’t, something gives.

Work through your main cost buckets and give each one a target percentage.

Here are some example buckets – you can add more or split these up if that makes sense for your business:

• People (wages, super, contractors)
• Cost of goods sold (stock, materials, direct labour)
• Legal and admin fees
• Marketing
• Bank fees
• Software and subscriptions
• Rent and other office overheads

This is where a clean chart of accounts earns its keep. If your expense categories are a mess, your percentages will be too, and you’ll be comparing rubbery numbers to a target that was never realistic in the first place.

Step 3: Pull your actuals from Xero and compare

This is the step that turns a spreadsheet exercise into something useful. Pull your actual expenses out of Xero as a percentage of revenue, and line them up next to your targets.

One catch. This only works on a reconciled, up-to-dateup to date file. If transactions are sitting uncoded or your bank feed’s a few weeks behind, your percentages will be wrong, and you’ll be making decisions on bad data. Garbage in, garbage out.

If you’ve already set a budget in Xero, this is a natural next layer on top of it. Worth a look back at how to create Xero budgets that actually work or spreadsheet vs Xero for budgeting if you haven’t set one up yet.

Step 4: Let the gap drive the decision

Once you’ve got target vs actual side by side, the gaps tell you exactly where to look.

Over target in a bucket? That’s your first stop. Maybe merchant fees have crept up because you switched payment providers. Maybe software subscriptions have quietly doubled because nobody’s cancelled the trials.

Under target somewhere? That might mean there’s room to invest. Maybe marketing’s been sitting well below target and could take more without denting the profit line.

Either way, you’ve stopped guessing. This is the difference between “sales are up, but I don’t know why profit isn’t” and having an actual answer.

This kind of trend analysis is a core part of good financial reporting for small business, and it’s exactly the sort of thing worth tracking as an ongoing KPI for small business, not a once-a-year exercise.

Know your ratios before the ATO does

Here’s the bit most generic advice on this topic misses. The ATO doesn’t just want you to understand your own numbers, they’re already comparing them.

The ATO publishes small business benchmark ratios by industry, covering 100 industries and updated using the latest tax return data. These benchmarks flag businesses whose ratios sit well outside the norm for their industry, which can mean a closer look at your return.

Knowing your own ratios first means no surprises. You can check where your business sits against the ATO’s benchmarks here, and it’s worth doing alongside your own target-vs-actual exercise above.

Stop guessing, start reading

Your P&L has always had the answer. It’s just been sitting there in dollars, waiting for someone to turn it into percentages.

Set your target. Turn every expense into a percentage. Compare it to what’s actually happening. Then let the gap tell you what to do next.

Once you know where your ship is leaking, you’ll be ready and more motivated to do the audit your expenses should get each year.

Payday Super is not a small change with a bit of setup. It is a fundamental shift in how employing someone works in Australia. The businesses that treat it that way from day one of FY27 will be fine. The ones that find out the hard way in October will have a much harder conversation with the ATO.

If you want to make sure your payroll setup is ready before July gets away from you, we can help.