Rising Costs, Shrinking Profits: Is Your Business Charging Enough?

Introduction: The Cost of Doing Business

Running an established business in the UK has become increasingly expensive.

Wages, energy, insurance, materials, software subscriptions and other everyday costs continue to put pressure on businesses. At the same time, customers are watching their spending, making it harder for business owners to increase prices.

According to the Office for National Statistics, 33% of trading UK businesses reported an increase in the prices of goods and services they purchased in September 2026.

www.ons.gov.uk

For family-run and partner-led businesses that have spent years building their customer base, team and reputation, these pressures can be particularly challenging.

If your costs are increasing but your prices are staying the same, what is happening to your profit?

You may have a healthy order book, growing turnover and a busy team, yet find that the business is keeping less of what it earns.

As you prepare for your next financial review, it’s worth looking beyond sales to understand what is happening to your profit margins.

More Sales Don’t Always Mean More Profit

Turnover is important, but it doesn’t tell the whole story.

Imagine an established business generating £1,000,000 in annual sales, with £600,000 in direct costs.

That leaves £400,000 in gross profit, representing a 40% gross profit margin.

Now consider two scenarios:

• Scenario 1: Direct costs increase by 10%, but sales remain unchanged.
• Scenario 2: Sales increase by 10%, but total direct costs increase by 20% because of higher input prices and the additional costs of delivering more sales.

In Scenario 1, gross profit falls by £60,000, or 15%, even though sales haven’t changed.

In Scenario 2, the business has increased sales by £100,000, but gross profit is still £20,000 lower than originally.

The business is selling more, doing more work and generating less gross profit.

And that’s before considering any increases in rent, administration or other overheads.

As you compare these scenarios with your own financial results, consider whether your business has experienced a similar pattern.

When you next review your numbers, look at how gross profit has changed alongside turnover. The relationship between the two can reveal more than either figure on its own.

Are You Charging Enough?

Many business owners are understandably nervous about increasing prices.

They worry about losing customers, becoming less competitive or damaging relationships they have spent years building.

In family-run and partner-led businesses, long-standing customer relationships are often a source of pride. Some prices may have been agreed years ago and increased only occasionally.

But keeping prices unchanged while costs continue to rise can gradually make a business less profitable.

Pricing should reflect more than what competitors charge. It needs to consider:

• The actual cost of delivering your product or service.
• Your business overheads.
• The value customers receive.
• The profit needed to sustain and develop the business.
• What customers are willing and able to pay.

A price that worked two years ago may no longer be appropriate today.

When you next review your pricing, consider which products, services or customer contracts have experienced the greatest cost increases.

You may discover that some activities remain profitable while others require a closer look.

This doesn’t mean every business should immediately increase prices. It means pricing decisions should be based on current information and commercial judgement.

The Hidden Cost of Discounts

Discounts can be useful for attracting customers, securing larger orders or encouraging repeat business.

However, in established businesses, discounts can become part of the normal way of working, particularly when negotiating with long-standing customers.

They can also reduce profitability more than owners realise.

Consider a service priced at £100, with direct costs of £60.

The gross profit is £40.

If you offer a 10% discount, the customer pays £90. Assuming your costs remain unchanged, your gross profit falls to £30.

A 10% reduction in price has resulted in a 25% reduction in gross profit.

To earn the same total gross profit, you would need to sell approximately 33% more services at the discounted price.

For businesses operating at scale, even small reductions in margins can have a significant effect on annual profit.

The next time a customer requests a discount, you’ll be better placed to assess its impact if you know the margin on that work.

Before agreeing, consider whether the additional volume, longer-term commitment or other commercial benefit genuinely compensates for the reduction in profit.

Not All Customers Are Equally Profitable

Two customers might generate the same revenue but contribute very different amounts to your profits.

One may place regular orders, pay promptly and require little additional administration.

Another may negotiate discounts, make frequent changes, require more staff time and regularly pay late.

Both contribute to turnover, but their overall value to the business may be very different.

For an established business with multiple customers, products or service lines, understanding where profits are generated can be particularly valuable.

It can also reveal whether a small number of customers account for a disproportionate amount of management time or operational resources.

As you begin to examine profitability by customer, product or service, you may identify opportunities to improve margins without necessarily increasing sales.

Sometimes, improving profitability means focusing more attention on the work that delivers the strongest returns.

Cost Control: Look Beyond the Obvious

Increasing prices is only one way to protect profit.

It is equally important to review costs regularly.

As businesses grow, their cost structures often become more complicated. New systems, additional staff, premises, suppliers and administrative processes may be introduced over time.

Some of these costs are essential. Others may no longer deliver the value they once did.

Consider reviewing:

• Software subscriptions and services you no longer use.
• Supplier contracts and purchasing arrangements.
• Energy, insurance and communication costs.
• Waste, rework and inefficient processes.
• Staff time spent on repetitive administration.
• Products or services that consistently generate poor margins.

However, cutting costs without understanding their impact can create other problems.

Reducing staff, training or customer service expenditure may save money initially but damage the business in the longer term.

As you review your operating costs, look for opportunities to improve efficiency without compromising the quality and reliability your customers expect.

The objective should be to spend money wisely, rather than simply spend less.

Know Your Numbers Before Making Decisions

Business owners don’t need to become accountants, but they should understand a few important financial measures.

Gross profit margin: How much of your sales revenue remains after paying the direct costs of providing your products or services.

Net profit: What remains after accounting for the other costs of running the business.

Break-even point: The level of sales needed to cover your costs.

Customer or product profitability: Which parts of your business make a worthwhile financial contribution.

Cashflow: Whether the business has enough money available to meet its commitments.

As we explored in our earlier article, Cashflow: The Lifeblood of Your Business in an Uncertain World, profitability and cashflow are closely connected, but they are not the same thing. A profitable business can still experience financial difficulties if it doesn’t have enough cash to meet its commitments.

For established businesses, management accounts can provide valuable information about changes in margins, overheads, customer profitability and overall financial performance.

At your next management accounts review, consider what the figures are telling you about the decisions you’ve made over the past few months.

Are margins improving? Are overheads growing faster than sales? Are particular customers or activities becoming less profitable?

A monthly review is often appropriate for an established business, with more detailed discussions involving directors or the management team when important decisions need to be made.

The earlier you recognise a developing trend, the more options you are likely to have.

Five Questions Every Business Owner Should Ask

At your next financial review, consider these five questions:

1. Pricing: When did we last review our prices against our actual costs?
2. Margins: Which products, services or customers generate the strongest returns?
3. Discounts: Are we offering discounts without fully understanding their effect on profit?
4. Efficiency: Where could we reduce unnecessary costs or improve productivity without affecting quality?
5. Planning: How much additional revenue would we need to generate to cover rising costs while maintaining our target profit?

Discussing these questions with your fellow directors, business partners or management team can help establish a clearer picture of where the business stands.

As you work through the answers, identify which areas deserve further investigation and which decisions can be made using the information you already have.

Final Thoughts: Profitability Is About Making Better Decisions

A successful business needs more than growing sales.

It needs to generate sufficient profit to reward its owners, support employees, meet financial commitments and invest in the future.

For established family-run and partner-led businesses, profitability also matters for succession planning, future investment and the long-term financial security of the people involved.

Rising costs are not always within your control. Your pricing decisions, understanding of profitability and management of business expenses are areas where you can take action.

Imagine reviewing your financial results six months from now and seeing that the decisions you’ve made have strengthened your margins. What would you need to start reviewing today to make that possible?

Regularly examining your numbers gives you the information needed to make sensible decisions before financial pressures become difficult to manage.

The aim is not simply to work harder or sell more. It is to make sure your business is earning enough from the work it already does.

How RMC Accountants Can Help

At RMC Accountants, we work with established family-run and partner-led businesses, helping them understand their financial performance and make informed commercial decisions.

Whether you need support reviewing profitability, understanding your margins, evaluating pricing decisions or planning for the future, we can help you make sense of the numbers.

When you’re ready to take a closer look at what is driving your business’s profitability, we’re here to help you explore the figures and consider your options.

RMC Accountants – Helping business owners understand their numbers and make better decisions.