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Margins can be deceptive.
They may often look healthy on paper, until you start asking questions like, “Why does cash still feel tight?” or “How can profits be this high if we barely made payroll last month?”
Most of the time, it comes down to one simple thing: allocation.
When payroll and overhead aren't properly allocated across your divisions or service lines, the numbers can be deceptive.
The Illusion of Healthy Margins
Let's say you're running a consulting firm with 3 arms: strategy, design, and training.
At first glance, your consolidated P&L looks great. Revenue's growing, expenses are stable, margins are up. But then someone asks, “Which division is actually driving profitability?” and suddenly, the room gets quiet.
You realize your design team's payroll sits in one big “wages” line. While Admin and Support staff are booked to overhead costs. Bonuses are spread out randomly or not allocated at all.
On paper, every division looks profitable. In reality, one's subsidizing the other.
And that's when confidence in your numbers starts to fade, not because the accounting is wrong, but because the accounting isn't detailed enough to tell the truth.
(We unpacked this more deeply in our post on Common Project Tracking Mistakes, particularly how unallocated payroll and overhead distort project-level margins. It's a surprisingly easy trap to fall into.)
Where Allocation Breaks Down
In many growing businesses, especially service-based ones, the challenge is the way data is organized.
Payroll often gets entered into the accounting system as one lump sum, so it gets booked into a single expense line, the month gets closed and you move on.
Behind that number are people doing very different kinds of work: consultants generating revenue, support teams keeping projects moving, managers overseeing multiple divisions. Without allocating wages (and benefits, bonuses, and taxes) to the right division, your cost structure becomes misleading.
A 35% margin might really be 18%. Or worse, the division that looks most efficient might actually be the one draining resources month after month. You can't make strategic decisions on that kind of data.
The Fix: Division-Level Tracking in Xero and QBO
This is where ‘Tracking Categories’ in Xero or ‘Classes’ in QBO come in - one of those deceptively simple tools that changes everything once it's implemented properly.
You can view your financials by division, location, or service line, without setting up separate books.
For example, you could have:
- Consulting
- Design
- Training
- Admin / Shared Services
Every transaction, including wages, gets tagged with the right category.
You can see that consulting runs at 42% margins while design sits closer to 18%. You can ask better questions, like “Is this a pricing issue or a delivery bottleneck?” rather than guessing which team is performing better.
Pro tip: You don't have to overcomplicate it. Start with your highest-level divisions, then refine as you go. We often help clients start simple, like 2-3 categories, and expand once the process sticks.
Why It Matters When You're Scaling
Growth has a way of exposing weaknesses that were easy to ignore before.
When you're small, a blended margin works. You can feel where the money's going. But as soon as you add layers - more people, more services, more locations - the gaps widen.
That's when accurate allocation becomes non-negotiable. Because now, you're making decisions about hiring, pricing, and expansion based on those same numbers. And if they're even slightly off, your strategy will be too.
We've seen owners/founders hesitate to open new service lines because margins “look thin,” when in reality, admin wages were skewing the data. We've seen others double down on what they thought was a profitable division, only to find out later that shared staff time was never allocated correctly. Accurate margins tell you where to go next, and where not to.
And Yes, Even Nonprofits Benefit
This isn't just for private businesses. Nonprofits face similar challenges: tracking by program, fund, or grant, and the same visibility problems arise when expenses are pooled together. Setting up clear tracking categories ensures transparency and helps organizations demonstrate exactly how donor or grant money is being used.
For both NPOs and service firms, allocation builds trust internally, with your board, or with investors.
Final Thoughts
We've helped hundreds of businesses structure their accounting so that every dollar has a destination.
From building allocation templates to training teams on tagging discipline, our goal is to replace “best guesses” with clarity. We want founders to open their P&L and feel certain, not just hopeful, about what their margins really mean.
And when you have that certainty, growth feels less like risk and more like direction.
Ready to see what your numbers are really saying?
Book a call and let's walk through how accurate wage allocation can change the way you see your business.
