What Fluctuating Margins Tell You About Your Business
I was reviewing the monthly accounts for a precision engineering client recently, and something jumped out at me.
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Their gross profit margin had swung from 38% in January to 51% in February, then dropped to 29% in March. When I asked the owner about it, he couldn’t explain the reason.
But here’s the thing, wild swings in your gross margin aren’t normal.
They’re a red flag telling you something’s wrong with how you’re tracking costs, pricing work, or running your operation.
Let me explain why gross margin volatility matters, what causes it, and what you should do when you spot it in your numbers.
What Is Gross Margin Anyway?
Before we talk about volatility, let’s make sure we’re clear on what gross margin actually is.
Gross margin is the percentage of revenue left after you’ve deducted your direct production costs.
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It’s calculated as:
Gross Margin % = (Revenue – Cost of Sales) ÷ Revenue × 100
So if you invoice £100,000 in a month and your direct costs (materials, production labour, manufacturing overheads) were £65,000, your gross profit is £35,000 and your gross margin is 35%.
This is different from net profit margin, which comes after you’ve also deducted all your operating expenses like sales costs, office overheads, and finance charges.
Gross margin focuses purely on your production profitability.
What Does “Normal” Volatility Look Like?
No manufacturing business has exactly the same gross margin every single month.
Some variation is natural and expected.
If your gross margin typically sits around 40% and it moves between 38% and 42% month to month, that’s normal variation. You’re in a stable range with minor fluctuations caused by small differences in product mix, material price changes, or production efficiency.
But if you’re regularly seeing swings of 10, 15, or 20 percentage points? If one month you’re at 45% and the next you’re at 28%? That’s not normal variation.
Why Gross Margin Volatility Is a Serious Issue
Wild swings in gross margin create several real problems for your business.
First, you can’t forecast properly. If you don’t know whether next month’s margin will be 30% or 50%, how can you plan cash flow? How can you budget for growth?
Second, it masks underlying problems. When margins are all over the place, you can’t see trends. You might have a product line that’s consistently unprofitable, but it gets hidden in the monthly noise. Or perhaps one of your production processes is becoming less efficient, but you can’t spot it because the numbers jump around too much.
Third, it suggests your costing isn’t accurate. If you’re pricing jobs based on inaccurate cost information, some jobs will make great margins and others will make terrible margins. The average might look okay, but you’re essentially gambling on each quote.
Fourth, it makes it impossible to measure improvement. You can’t tell if changes you’ve made are actually working. Did that new machine improve efficiency? Has waste reduction kicked in? You can’t tell when the baseline keeps shifting.
Finally, it damages decision-making. Should you invest in new equipment? Can you afford that new hire? Is it worth chasing that big contract? You need stable, predictable margins to make these calls confidently.
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Common Causes of Gross Margin Volatility
Let’s look at what actually causes these wild swings. In my experience, it usually comes down to one or more of these issues.
Inconsistent Cost Allocation
This is the big one. If you’re not allocating costs consistently month to month, your margins will bounce around.
Maybe you record all your material purchases when you buy them rather than when you use them. So the month you stock up, your cost of sales rockets and your margin drops. The next month, you’re using stock you’ve already paid for, so your margin looks brilliant. Neither figure is accurate.
Or perhaps you’re inconsistent about allocating manufacturing overheads. Some months you include them properly, other months they get missed or double-counted. Your margin swings but nothing’s actually changed in your business.
Poor Product Mix Tracking
If you make multiple products with different margins and you’re not tracking which products you sold each month, your overall margin will vary with your product mix.
Imagine you make two products: Product A has a 35% margin and Product B has a 50% margin. In a month where you sell mainly Product A, your overall margin will be closer to 35%. In a month dominated by Product B sales, it’ll be nearer 50%.
This isn’t necessarily a problem if you understand it and can explain it. But if you can’t break down your margin by product, you don’t really know what’s driving your profitability.
Inaccurate Job Costing
If you’re estimating costs for jobs rather than tracking them accurately, you’ll get volatility.
You might quote a job thinking it’ll cost £8,000 and price it accordingly. If it actually costs £6,000, your margin on that job is much better than expected. If it costs £10,000, your margin is much worse. Do this across multiple jobs and your monthly margin becomes unpredictable.
Accurate job costing such as tracking actual materials used, actual labour hours, and properly allocated overheads eliminates this estimation.
Material Price Fluctuations Without Price Updates
Material prices change, especially for metals, plastics, and energy-intensive products. If your material costs jump 15% but you’re still charging prices based on old costs, your margin gets squeezed.
The opposite can happen too. Material prices drop but you’re still charging based on higher costs, so your margin inflates. Unless you’re actively managing this, your margin will reflect material market movements rather than your business performance.
Timing Differences in Revenue and Cost Recognition
This gets a bit technical, but it’s important. Some manufacturers recognise revenue when they invoice, but costs when they pay suppliers. Or vice versa. This creates timing mismatches that distort monthly margins.
For accurate margins, you need to match the costs of production with the revenue from selling those products in the same period. If you’re invoicing for work done in March but the material costs don’t hit your accounts until April when you pay the supplier, March’s margin looks artificially high and April’s looks artificially low.
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Seasonal or Cyclical Business Patterns
Some manufacturing businesses are genuinely seasonal. Maybe you make garden furniture and do 70% of your sales in spring and summer. Or you produce components for agricultural equipment with a strong seasonal pattern.
If this is your reality, some margin variation is unavoidable. But you should understand the pattern and be able to explain it. If margins swing randomly rather than following a predictable seasonal curve, something else is going on.
One-Off Jobs Distorting the Picture
A single large job with an unusually high or low margin can skew your whole month, especially in smaller manufacturing businesses.
If you normally do £80,000 a month in sales and you land a £50,000 rush job at a 60% margin because the customer was desperate, that month’s overall margin will spike. The next month, back to normal work, your margin drops back down. The volatility doesn’t reflect any change in your core business.
How to Diagnose What’s Causing Your Volatility
If you’re seeing volatile gross margins, here’s how to figure out what’s causing it.
Track margin by product or product group. Break down your monthly margin by what you’re actually selling. This quickly shows you if volatility is driven by product mix or if individual products have unstable margins.
Review your cost allocation methods. Are you consistent month to month? Do you allocate overheads the same way every time? Are you matching costs to the revenue they generate?
Compare estimated costs to actual costs. For jobs where you quoted based on estimated costs, how did the actual costs compare? Big differences here suggest your costing needs improving.
Look at material costs as a percentage of revenue. Is this percentage stable or does it jump around? If it’s volatile, either your material usage isn’t consistent or your pricing isn’t keeping pace with material cost changes.
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Check your timing. Are you recognising revenue and costs in the same periods? Or are there timing mismatches creating artificial volatility?
Analyse large jobs separately. Pull out one-off or unusually large jobs and look at your margin with and without them. This shows you whether your core business is stable or not.
What Good Gross Margin Tracking Looks Like
Manufacturers with good financial control typically see relatively stable gross margins with explicable variations.
They track margin by product line or category, so they understand what’s driving overall performance. They use consistent cost allocation methods month to month. They have accurate job costing systems that track actual costs, not just estimates.
They recognise when material price changes are affecting margins and adjust pricing accordingly. They can explain variations when they happen.
Most importantly, they know what their “normal” margin range is and investigate quickly when results fall outside it.
Steps to Reduce Gross Margin Volatility
If you’re experiencing volatile margins, here’s what to do about it.
Get your cost allocation consistent. Decide on a method for allocating manufacturing overheads and stick to it. Make sure materials are expensed when used, not when purchased. Ensure labour costs match the period when the work was done.
Implement proper job costing. Track actual materials used, actual labour hours, and actual machine time for each job. Compare this to what you estimated. Use this data to improve future estimates and pricing.
Review pricing regularly. When material costs change significantly, update your pricing. Don’t wait until margins are being squeezed before you act.
Track product-level profitability. Know which products or product categories deliver which margins. This lets you explain mix-driven variation and make better decisions about what work to pursue.
Set up management accounts properly. Work with an accountant who understands manufacturing to get your management accounts structured correctly. Accruals accounting, proper period-end procedures, and consistent reporting are essential.
Monitor margin trends, not just absolute numbers. Look at rolling three-month averages to smooth out one-off variations. This shows you the underlying trend more clearly than month-to-month comparisons.
When Some Volatility Is Acceptable
I don’t want to suggest all margin variation is bad. Some is genuinely unavoidable.
If you do genuine seasonal work, you’ll have seasonal margin patterns. If you take on occasional rush jobs at premium margins, those months will look different. If you make products with long lead times, there might be timing effects.
The key is understanding and being able to explain the volatility. If you can say “March was 5 points higher because we completed two high-margin custom jobs that had been in progress for eight weeks,” that’s fine. You understand what happened and why.
It’s the unexplained, random volatility that’s a red flag.
The Bottom Line on Margin Volatility
Stable, predictable gross margins are a sign of a well-controlled manufacturing business. You understand your costs, you price appropriately, you track performance accurately, and you can explain variations when they occur.
Volatile gross margins suggest problems with costing, pricing, or financial tracking and those problems cost you money even if you can’t see exactly where.
If your margins are all over the place and you don’t know why, don’t just accept it as “how manufacturing is.”
It’s fixable, and fixing it will give you much better control over your business.
Getting your cost tracking and management accounts properly sorted isn’t the most exciting work, but it’s absolutely fundamental to running a profitable manufacturing operation. With accurate, consistent financial information, you can make better decisions, spot problems early, and grow with confidence.
Concerned about volatile margins in your manufacturing business?
Not sure if your cost allocation and job costing are giving you accurate information?
Let’s talk about your numbers and how proper product costing and budgeting can give you the stable, reliable financial data you need to run your business effectively.
Get in touch for a straightforward conversation about your management accounts.
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About the Author
Written by Yesim Tilley Founder of Skynet Accounting is a chartered accountant with over 20 years of experience supporting manufacturing and engineering businesses across the UK. Specialising in cost analysis, product costing, and financial strategy, she helps industrial businesses understand their numbers and make more profitable decisions. Skynet Accounting provides tailored finance, compliance, and taxation support designed specifically for the manufacturing and engineering sector.