Businesses across the UK continue to face increasing cost pressures, with many finding that the price of goods and services they purchase is rising faster than the prices they can charge customers.
Rising business costs and profit margins remain a significant concern for business owners looking to maintain profitability.
While sales growth often attracts the most attention, profitability is ultimately what drives business success. If costs increase without a corresponding rise in selling prices, margins can quickly come under pressure.
At The MGroup, we regularly help businesses across Oxfordshire and beyond understand the impact of changing costs, review profitability and identify practical ways to protect margins and cash flow.
Partner Insight
“Businesses often focus on turnover growth, but sustainable profitability comes from understanding and managing margins.”
Says Ollie Squire, Partner at The MGroup.
What the Latest ONS Data Tells Us
Recent figures from the Office for National Statistics (ONS) highlight the challenge many businesses are facing.
According to the latest Business Insights and Conditions Survey, 33% of trading businesses reported an increase in the prices they paid for goods and services during September.
However, only 12% reported increasing the prices of goods and services sold to customers.
While these figures do not necessarily relate to the same businesses, they demonstrate a common issue. When purchasing costs rise faster than selling prices, profitability can begin to fall, even when sales volumes remain strong.
External source:
- Office for National Statistics (ONS): https://www.ons.gov.uk/
Why Small Cost Increases Can Have a Big Impact
Many business owners underestimate how quickly seemingly modest cost increases can affect profitability.
Consider a business selling a product for £100:
- Selling price: £100
- Direct costs: £60
- Gross profit: £40
If direct costs increase by 10%, the cost rises to £66.
The business still sells the product for £100, meaning:
- Selling price: £100
- Direct costs: £66
- Gross profit: £34
Although costs only increased by £6, gross profit has reduced by £6 per sale, representing a 15% reduction in gross profit.
For businesses operating on tight margins, these changes can significantly affect overall profitability over time.
Review Profitability Before Raising Prices
The immediate response to rising costs is often to increase prices. However, this is not always the best or only solution.
Before adjusting pricing, businesses should review:
- Gross profit margins by product or service
- Profitability by customer
- Supplier performance and pricing
- Operational efficiency
- Areas where waste can be reduced
Regular management reporting can quickly identify where profitability has deteriorated and where improvements can be made.
Businesses may discover opportunities to:
- Renegotiate supplier agreements
- Review purchasing arrangements
- Improve productivity
- Focus resources on higher-margin work
- Reduce unnecessary expenditure
Partner Insight
“Taking action early often creates more opportunities and reduces risks than waiting until margins have already deteriorated.”
Says Ollie Squire, Partner at The MGroup
Are Your Contracts Protecting You?
One area often overlooked is the impact of fixed-price agreements.
Long-term contracts can become problematic when material, labour or distribution costs continue to increase while selling prices remain fixed.
Businesses should periodically review:
- Customer contracts
- Supplier agreements
- Quotation terms
- Price review clauses
- Inflation adjustment mechanisms
Where appropriate, future agreements should include provisions that allow pricing to be reviewed if operating costs rise significantly.
This can help protect profitability while maintaining positive customer relationships.
Don’t Ignore the Cash Flow Impact
Reduced profit margins affect more than just the profit and loss account.
Higher purchasing costs often require businesses to commit more cash to stock, materials and supplier payments. If customers continue to pay on longer credit terms, working capital requirements can increase significantly.
As a result, businesses may experience:
- Increased pressure on cash reserves
- Greater reliance on overdrafts or finance facilities
- Reduced flexibility for investment
- Slower growth opportunities
Regular cash-flow forecasting can help identify potential issues before they become serious problems.
Why Turnover Alone Doesn’t Tell the Full Story
Many businesses measure success through revenue growth. However, turnover growth is only positive if it translates into improved profits and stronger cash flow.
A business can increase sales while simultaneously becoming less profitable if costs rise too quickly.
Therefore, business owners should regularly review:
- Sales performance
- Gross profit margins
- Operating costs
- Supplier pricing
- Cash-flow forecasts
Looking at these areas together provides a much clearer picture of overall business health.
What Should You Do Now?
✅ Review gross profit margins monthly
✅ Identify products, services or customers with declining profitability
✅ Assess supplier pricing and purchasing arrangements
✅ Review contracts and quotation terms
✅ Update cash-flow forecasts regularly
✅ Consider pricing adjustments where commercially appropriate
✅ Seek professional advice before profitability becomes a concern
Key Takeaways
- Rising costs can significantly reduce profit margins, even when sales remain strong.
- Small cost increases often have a greater impact on profitability than expected.
- Reviewing costs should be considered before increasing prices.
- Cash-flow pressures often accompany declining margins.
- Regular monitoring of profitability helps businesses respond more effectively.
How We Can Help
At The MGroup, we work with businesses across Oxfordshire and beyond to improve profitability, strengthen cash flow and make informed commercial decisions.
Whether you need support reviewing margins, assessing pricing strategies or understanding the financial impact of rising costs, our team can help you identify practical opportunities to improve performance.