The trap of only looking at revenue

“We billed €80,000 this year” says nothing about whether the business is doing well. You can bill €80,000 and end up with €5,000 in profit, or bill €40,000 and end up with €15,000. Revenue is the starting point, not the answer.

Gross margin: what’s left after the direct cost

Gross margin is what’s left from each sale once you deduct the cost directly tied to producing or delivering it (materials, goods bought for resale, hours worked by whoever delivers the service if it’s outsourced, etc.):

Gross margin = (Revenue − Direct cost of sales) / Revenue

If you sell a product for €100 and it costs you €60 to buy or make it, your gross margin is 40%. This figure tells you whether your core activity, on its own, leaves a reasonable margin before you factor in anything else.

Net margin: what you actually take home

Net margin subtracts, on top of the direct cost, all the other costs of the business: rent, utilities, accounting fees, marketing, insurance, loan interest, taxes…

Net margin = Final profit / Revenue

This is where a lot of businesses with a good gross margin get a nasty surprise: a 40% gross margin can turn into a 5% net margin or less if overheads are high relative to what the business bills.

Why this difference matters for decision-making

  • If your gross margin is already low, the problem is in how you produce or buy — raising your selling price or lowering your production/purchase cost is the main lever.
  • If your gross margin is good but your net margin is poor, the problem is your cost structure (too many fixed costs for your volume) — the lever there isn’t charging more, it’s reviewing costs or growing volume to spread them out.

Mixing up these two diagnoses leads to the wrong decision: raising prices when the real problem is fixed costs, or cutting costs when the real problem is that each sale already leaves little margin to begin with.

A business that “bills a lot” can be doing badly, and one that bills little can be doing very well

That’s why the goal shouldn’t just be “bill more”, but understanding where in the chain margin is being lost. This is exactly the kind of analysis worth reviewing with someone who looks at your numbers with perspective, not just records them. Write to us at contacto@asesoriamadal.es if you’d like to work out both your margins with your real figures.