Revenue is up. Why is there less money left over?

It’s the time of year when I’m going through and doing my third quarter meetings with clients here in Tucson. A recurring theme is present in a lot of financials. Gross revenue is growing but the cost of goods sold (COGS) for many companies is growing faster.

I’ve seen it so far in:

Veterinary Hospitals
Contractors and builders
Mechanical, Electrical, Plumbing (MEP)
Manufacturers
Retail
Businesses that depend heavily on materials, supplies, inventory, freight, or contractors

Many clients are missing the red flags because revenue is up, teams are busy, the schedules are full. But less of each dollar of revenue is making it past the direct cost of doing the work. More work doesn’t automatically mean more profit. Sometimes it just means buying more expensive materials, paying more freight, and working harder to keep less.

Why costs are rising faster than revenue right now

According to the U.S. Bureau of Labor Statistics, in August 2026, producer prices for final demand were 5.4% higher than a year earlier. Prices for processed goods used as business inputs were up 11.5%, while unprocessed inputs were up 12.8%. Diesel prices at the producer level jumped 24.1% in August alone, and truck-freight prices increased 2.0% in the same month. Now of course this doesn’t affect every business equally, but it lends some validation to what I’m seeing in client financial statements.

The national average retail diesel price was $5.462 per gallon in August 2026, up from $4.955 in July, according to the U.S. Energy Information Administration. That kind of movement affects more than the company filling its own trucks. It works its way into all supplier pricing, freight, deliveries, equipment mobilization, and purchased materials.

You can’t control diesel or freight costs or what a supplier will charge you next month. You can control how quickly you notice the effect on your business.

What your gross margin actually tells you

Gross profit = Revenue − Cost of goods sold

Gross margin percentage = Gross profit ÷ Revenue

Use a simple example:

Revenue: $100,000
Cost of goods sold: $65,000
Gross profit: $35,000
Gross margin: 35%

If that business grows revenue to $120,000 but its cost of goods sold rises to $84,000, gross profit increases slightly, but gross margin falls from 35% to 30%. The company is busier and bringing in more money, but it is keeping less from every sale.

At $2 million of annual revenue, a four-percentage-point decline in gross margin represents approximately $80,000 of gross profit that is no longer available to cover payroll, rent, equipment, debt, taxes, or the owner.

Four ways to check your margins regularly

1. Look at the percentages, not just the dollars

Gross profit dollars can climb while the margin actually gets worse. That’s why looking only at revenue or gross profit can be misleading.

Put your monthly margin review on your calendar after your accounts are all reconciled. Don’t wait for year end or when cash starts getting low. Review your profit and loss and look at your:

Revenue
Cost of goods sold
Gross margin percentage
Cost of goods sold as a percentage of revenue

Then compare these numbers against the same numbers in the previous month, the previous quarter, the previous year, and what your expected margins are. If gross margin falls from 35% to 31%, that is a four percentage point decline, not merely a 4% change. Those missing percentage points can grow to be a very large number.

2. Make sure your cost of goods sold is telling the truth

Reviewing your margin report is only useful if your costs are recorded correctly. Check with your finance team (or with us, if we look after your books) to diagnose common COGS problems and confirm they’re recorded correctly. Common issues include things like:

Materials recorded in general operating expenses one month and cost of goods sold the next
Freight and delivery costs left out of job costs
Subcontractor costs coded inconsistently
Direct production payroll mixed with administrative payroll
Inventory purchases treated as immediate expenses without adjusting ending inventory
Old or unusable inventory still carried at full value
Work in progress omitted or updated only at year-end
Credit-card purchases or supplier bills entered weeks after the related revenue
Waste, callbacks, warranty work, and rework never assigned to the job that caused them

What counts as a direct cost depends on your industry. For contractors, that usually means materials, subcontractors, direct labor, equipment, and job overruns. For trades, it means capturing technician labor, parts, permits, equipment rentals, and callbacks consistently. For veterinary hospitals, it means medications, medical supplies, laboratory costs, food, and other items directly connected to patient revenue.

If your bookkeeping isn’t consistent, your margin will move month to month when your business actually hasn’t. Before reacting to the percentage, make sure you trust what went into it. (We wrote more about this in The Hidden Cost of Poor Bookkeeping.)

3. Set your margin triggers before you need them

You’ll hear it from us on repeat: it helps to have a set process for margin decisions every month, so you’re not reinventing or changing how you make them each time. Establish a normal range that triggers further investigation.

Each business needs to set their own triggers, but for example you might have:

Healthy margin, no need to investigate: within two points of your target margin
Cautionary margin, worth a closer look: two to three points below target
Red flag margin, high priority to investigate: more than three points below target, or below target for consecutive months

4. Investigate the cause before you raise prices

When your margin trips one of your triggers, start by asking:

Did supplier prices increase?
Has the company updated estimates and price sheets?
Are quotes being honored too long?
Are crews using more material or labor than expected?
Is waste, spoilage, theft, or rework increasing?
Are vendor discounts being missed?
Is freight being passed through appropriately?
Is the company performing unbilled work?
Has the mix of services or products changed?
Are inventory counts reliable?
Is one customer, job, or product dragging down the average?

Do you see how raising prices on your clients isn’t the only answer after we do some investigation? The biggest concern for business owners when we start talking COGS and remedying their margin is that they don’t want to raise prices on their client base again. What if instead we used a combination of solutions like:

Updating pricing or minimum charges
Shortening the period for which quotes remain valid
Adding material-escalation language where appropriate
Requiring change orders before additional work begins
Renegotiating supplier terms
Consolidating or changing purchasing
Reducing waste and callbacks
Stopping chronically unprofitable work
Adjusting team workload, scheduling, or production processes
Requiring deposits for material-heavy projects

Sometimes the answer is a price increase. Sometimes it’s better purchasing, tighter estimates, fewer callbacks, or the hardest in my opinion, admitting that a particular kind of work has never made your business much profit and ceasing that product or service.

You don’t need perfect forecasting, just earlier visibility

Costs have been unusually difficult to manage for the past few years. Fuel moves. Freight moves. Materials move. Tariff announcements and supply disruptions can make a quote feel stale before the customer has even signed it.

The goal is not to predict every change. The goal is to notice when your business has started absorbing those changes instead of passing them through or adjusting around them.

If you’d like a second set of eyes on your margins, get in touch. We’ll walk through your numbers with you and help you work out what’s really going on,