Ask an Australian business owner their gross margin and most can tell you. Ask them which of their five service lines makes money and which quietly loses it, and the room goes quiet.
That gap is not a bookkeeping detail. It is the reason cost-cutting lands on the wrong thing, the reason price rises get applied uniformly instead of where the room is, and the reason businesses fire people while continuing to sell work that never paid.
This is how to close it. Allow two hours.
Why the overall number hides everything
A business at 45% gross margin sounds healthy. But “45%” is an average, and averages conceal.
| Service line | Revenue | Direct cost | Gross margin |
|---|---|---|---|
| Installation | $420,000 | $278,000 | 33.8% |
| Maintenance contracts | $260,000 | $115,000 | 55.8% |
| Consulting | $180,000 | $67,000 | 62.8% |
| Product resale | $140,000 | $119,000 | 15.0% |
| Blended | $1,000,000 | $579,000 | 42.1% |
Same business. The blended figure tells you nothing actionable. The line-level figures tell you four different stories and demand four different decisions.
And this is only gross margin. Once you allocate overhead, product resale is almost certainly losing money outright.
Step 1 — Define your lines
Split by how the work actually differs, not by how your invoices happen to be worded. A useful line is one where the cost structure differs materially from the others.
Five to ten lines is the right resolution. Fewer and you are back to averaging; more and you will not maintain it.
If one client represents more than about 15% of revenue, treat them as their own line as well. Concentration is its own risk and its own margin story.
Step 2 — Assign direct costs
A direct cost is anything that would disappear if you stopped selling that line.
Include: materials and stock, subcontractors, freight on that work, merchant and platform fees, software licensed specifically for that line, and the labour hours directly delivering it.
Exclude: rent, admin salaries, your own wage, insurance, general software, marketing. Those are overheads and they come next.
On labour — this is where most people get it wrong. Use the hours actually spent delivering, at a loaded rate (wage plus 12% super, plus payroll tax if you are above your state threshold, plus workers comp). Not the base wage. A $65,000 employee costs closer to $78,000.
If you do not track time, estimate it once and be honest. A rough allocation you actually complete beats a precise one you never start.
Step 3 — Allocate overhead
This is what turns gross margin into true margin, and it is the step almost everyone skips.
Take total annual overheads — rent, admin salaries, insurance, general software, utilities, professional fees, marketing, finance costs — and spread them across lines.
Two defensible methods:
Revenue share. Each line carries overhead in proportion to its revenue. Simple, fast, defensible. Use this if you are doing it for the first time.
Labour share. Each line carries overhead in proportion to the labour hours it consumes. More accurate when lines differ sharply in labour intensity, or when one line eats disproportionate management attention relative to what it bills.
Pick one, apply it consistently, and do not agonise. The insight comes from the ranking, not from the third decimal place.
Step 4 — Read the result
Now the same business, with $270,000 of overhead allocated by revenue share:
| Line | Revenue | Gross profit | Overhead | True profit | True margin | Verdict |
|---|---|---|---|---|---|---|
| Consulting | $180,000 | $113,000 | $48,600 | $64,400 | 35.8% | Strong |
| Maintenance | $260,000 | $145,000 | $70,200 | $74,800 | 28.8% | Strong |
| Installation | $420,000 | $142,000 | $113,400 | $28,600 | 6.8% | Marginal |
| Product resale | $140,000 | $21,000 | $37,800 | −$16,800 | −12.0% | Losing money |
| Total | $1,000,000 | $421,000 | $270,000 | $151,000 | 15.1% |
Look at what just became visible.
Installation is the biggest line by revenue and nearly the smallest by profit. It is 42% of turnover and 19% of profit. Every conversation in that business is probably about installation, because it is the loudest.
Product resale is destroying value. It looks like $140,000 of revenue. It is actually a $16,800 annual donation, plus the capacity it consumes.
Consulting is the best business they have and is almost certainly under-resourced and under-sold, because it is quiet.
Step 5 — Act on it
Four verdicts, four moves.
Losing money → Reprice to profitability or exit. Do not give this line a 5% rise; it needs 25%. If the market will not carry that, the line should not exist. Revenue that costs more to serve than it pays is worse than no revenue, because it consumes capacity you could sell to someone profitable.
Marginal (under 5%) → Reprice, or restructure how you deliver it. Often the fix is not price but process: the line is fine, the delivery is inefficient.
Acceptable (5–15%) → Test a price rise here first. These lines usually have more room than the owner assumes and less attrition risk than the strong ones.
Strong (15%+) → Protect and scale. The real question is not how to improve it but where can I sell more of this.
The client version
Run the same logic across your largest clients, and add one column: hours consumed.
| Client | Revenue | Cost to serve | Hours | Profit/hour | Verdict |
|---|---|---|---|---|---|
| Client A | $180,000 | $96,000 | 620 | $135 | Keep and grow |
| Client B | $95,000 | $61,000 | 540 | $63 | Below target |
| Client C | $74,000 | $79,000 | 480 | −$10 | Losing money |
Client C is the one everyone in the business complains about. Now you have the number that ends the argument.
The pattern is consistent: the client who consumes the most attention is rarely the one who pays the most for it.
Common objections
“I don’t track time properly.”
Estimate. Get each person to sketch how last month split across lines. Directionally right beats precisely absent.
“Overhead allocation is arbitrary.”
Somewhat. But not allocating it is the more arbitrary choice — it assumes overhead belongs to nothing, which is how loss-making lines survive for years.
“My lines share resources, so I can’t separate them.”
That is exactly why you need to. Shared resources are how a bad line hides inside a good one.
“I already know which line is weakest.”
Most owners are right about the direction and wrong about the magnitude. There is a large difference between suspecting and being able to say “this costs us $16,800 a year.”
Do it every quarter
Once built, this takes about twenty minutes to refresh. Put it in the calendar for the week after each BAS.
The value compounds — a single snapshot tells you where you are, four quarters tell you which direction each line is moving, which is the more useful information.
Where to go next
- The Profit Lever Hierarchy — this calculation unlocks levers one and two
- How to Raise Prices Without Losing Customers — what to do once you can see the room
- How to Fire an Unprofitable Client
- Five Things to Do Before You Make Someone Redundant
- Profit Lever Diagnostic
Worked examples are illustrative. Loaded labour rates assume 12% superannuation and vary by state payroll tax threshold and workers compensation rate. General information, not financial advice.