It's all in the Margins

We have all heard the saying "Revenue is Vanity, Profit is Sanity but Cash is King" - many people will go insane selling a lot but not seeing any cash. This is not only stressful for a business owner and family, but means that growth is throttled, opportunities missed and the business is less prepared to weather any rough patches.

What is Margin?

• Margin is what is left over from a sale after paying for costs associated with that sale. If an item is sold for $10 and cost the business for that product is $5 you would have $5 or 50% Gross Margin, if you then incurred an additional $3 of overhead expenses and were left with $2 Net Profit your Net Margin would be $2 or 20% - simple example.

How is it calculated?

• The example above was very simplistic - to calculate Gross Margin you need to group all costs relating to the product - these could include raw materials, finished goods, production costs, all depending on the product being sold. Critically, tracking costs for what is sold rather than purchased is essential to accurately reporting margin.

Why is this important?

• Understanding Margin is crucial to a business succeeding - this makes sure that every sale is contributing sufficiently to cover overheads and leave profit (rather than the other way around - which will quickly bury any busy business). A business that understands it's margins will also have a better understanding of their cost structure, what costs are variable, semi variable and fixed - important for times of rapid growth or slowdowns.
• Understanding your margin can also help you benchmark against other businesses in the same industry or other investment opportunities

What if I sell multiple products or services?

• If you run a business with different product divisions the analysis should be at a division level at a minimum - this will help identify divisions that are low margin, high margin, coupled with strategic information will form an important part of decision making and resource allocation.

Do I need a system to help with this?

• At a basic level an understanding using a tool like excel is a great start, especially for a small simple single product business. From here Xero does basic inventory reporting that works well for people who buy and resell with no manufacturing and limited complexity. If you have multiple products, manufacturing / processing and or multiple sales channels looking at a more comprehensive system will be required.
  
  The reality is that your costs and margins today will be different in a month, year or maybe even a week, or in other words are very dynamic- a comprehensive system will provide you will real time information around current costs and allow a raft of reporting to help you made decisions.

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If you are struggling to understand where all your cash is or you want to take your business to the next level - understanding Margins is a must. Please feel free to get in touch for a catch up.

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