June 26, 2026
“What are my margins?” is the top 2 question most clients ask advisors, as found in our Fathom’s State of Financial Storytelling 2026.
Here’s why: in business, growth is often the ultimate goal. But sometimes, some small business owners and entrepreneurs who finally hit their growth targets get caught in a cycle where their increased sales don’t translate into increased profit. Their growth has become a trap, eating away at their margins.
Read this blog to learn how this “profit margin trap” happens, as well as actionable insights to help you steer clear of it.
If your increased sales aren’t translating into increased profits, you may be hitting a problem that naturally comes with growth: more sales have increased your costs and operational complexity, which is draining your margins.
Here’s what’s happening:
More sales, low profits can signal margin erosion. Margin erosion is the slow decline of your business’s profitability when your costs rise faster than your prices. As these costs accumulate, you end up keeping less profit from every dollar you earn, even as your revenue grows.
Services, retail, construction, hospitality, and e-commerce businesses can experience margin traps. Specific causes vary per industry. But in all cases, the business’s revenue growth creates the appearance of success, while hiding costs that leak what the business actually keeps.
Margin erosion is often called "death by a thousand cuts" because it hardly shows up as a single, obvious problem. Instead, it builds slowly through hidden rising costs and operational inefficiencies. But because you’re seeing high revenue figures on paper, you may miss what's happening behind the scenes.
Not all revenue is equally valuable. Some sales turn into healthy margins and convert to cash quickly (“good revenue”). Others require more time, resources, discounts, or rework to deliver (“bad revenue”).
Consider these two projects that both generate $10,000 in revenue:
From a revenue perspective, both are identical. But from a margin perspective, Project A gives you more profit, while Project B consumes more resources, costing you more to deliver.
Taking on more “bad revenue” to keep sales up can increase your revenue but shrink your margins, creating a gap between your revenue growth and profitability.
Revenue growth answers “Are your earnings increasing over time?” Profitability answers “how much of your revenue do you actually get to keep?” In practice, you can achieve strong revenue growth even while your profitability remains flat or declines (and vice versa).
Overhead creep, scope creep, heavy discounting, low-margin segments, and cost inflation can erode your margins. To improve your profit margins, start by identifying which ones apply to your business.
As your business grows, your operating expenses go up. More clients and projects mean you’ll need more software subscriptions, support staff, or office spaces. If your base pricing doesn’t rise to match these commitments, your margins may shrink month by month.
An engagement quoted for 20 hours can easily stretch to 28 hours. Absorbing these extra hours to keep a client may seem beneficial. But across a full client roster, scope creep can substantially slash your margins. You’ll see this especially when all those extra hours aren’t billed or tracked.
Heavy discounting to win a new account or retain an old one can shrink your margins. When you start with heavy discounts, it becomes the baseline expectation. This makes your pricing difficult to reverse later on without damaging the relationship.
Your overall performance can look healthy even when some product lines are running at a loss. This is why 15% of all strategic questions small businesses ask their advisors are about what their margins are by product, service line, or client. Granular, segmented visibility into your margins is key to spotting these revenue leaks.
Supplier rates, wages, and freight costs rise and fall based on economic conditions. If you don’t update your pricing to match inflation, your margins will absorb the difference.
Factors that threaten your margins depend on how your business makes money and delivers value, and where your costs sit in your business. That's why margin pressure can look different per industry.
Scope creep is one of the biggest margin killers in services. Examples of scope creep are unbilled revisions, work outside of the agreed scope, and senior staff being pulled into lower-value tasks. You might even miss signs of scope creep since your team looks busy with lots of projects.
Running constant clearance activities and discounts to move stock is good for sales volume, not your margins. A stellar headline revenue can also easily hide costs from product returns, supplier shipping expenses, and uneven performance across product lines.
Unapproved change orders and scope expansion without your client signing off on them can hurt your margins. Your labour hours extend, your subcontractor costs rise, but your revenue stays fixed, which is bad for margins.
Great sales from a strong weekend or peak hours can still give low profits due to rising ingredient costs, food waste, and staffing inefficiencies.
Like retail, e-commerce’s margins are affected by heavy discounting and product returns. They do have costs that retail doesn’t have, like acquisition costs, shipping, and platform fees, that affect profitability.
Identifying margin traps early requires spotting where profit is being lost before it shows up in your results. Some SMBs don’t see this because they can’t see their data in a way that connects their day-to-day activity to their profitability.
Margin issues don’t show up as a sudden drop in profit. Instead, they build slowly through patterns that feel like regular business activity.
Common warning signs include:
To avoid profit margin traps, you need to see past your headline revenue and get into a more granular, segment-level analysis. You need KPI dashboards that show your performance by customer, service line, and product. Combining this with forecasting and financial analysis software can deepen your visibility.
In fact, 62% of the most confident responders in Fathom’s State of Financial Storytelling survey combine cash flow forecasting software and management reporting software to confidently answer board-level questions about cash flow and margins.
These combined tools help them make reports that clearly show what happened, why it happened, and what’s likely to happen next.
Metrics these tools commonly track include:
High revenue doesn’t always signal financial health; your margins do. That’s why granular, segmented margin visibility is a valuable growth capability for SMBs.
The key takeaway: the most successful businesses aren’t those growing the fastest, but those that see which parts of their operations are actually working.
Hamidah Abd Rahman is a content writer at The Access Group and Fathom. With a strong focus on B2B industries, she has written content across sectors such as data science, supply chain, aviation, and ERP.
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