Profitability
Net margin is a structure question
The problem
Gross margin is an operations conversation. Net margin is an overhead and structure conversation, and most businesses never hold it deliberately.
Why it matters
Overhead added during a strong year becomes permanent. Net margin quietly compresses until the business needs more revenue just to fund itself.
How to know if you have this
- Overhead has grown faster than gross profit
- Net margin is lower than three years ago at higher revenue
- You cannot state a target net margin
- Owner compensation and distributions are mixed together
How Advisory Motion solves it
- 01Set a target net margin appropriate to your industry and model
- 02Separate owner compensation from distributions so the operating result is visible
- 03Review overhead against the gross profit it enables, not against last year
- 04Model the revenue required to fund each structural addition before it is made
Illustrative example
Revenue up 40%, net margin down 3 points
Three administrative hires and a larger facility were added during growth. Modeled properly, the business needed $1.4M more revenue just to return to prior net margin — which reframed the next hiring decision entirely.
Illustrative composite · not a client identification
Where this connects