At times, business years really do feel like dog years. You can do the right things but at the wrong time and it gets messy. One thing I’ve learned is that complexity can be your enemy and keeping it simple helps you focus on the right things. In the day to day grind and business it’s hard to know what the right thing is though right? I’m here to tell you that you need to take care of the goose that lays the golden egg. And that goose is your margins.
Profit and cash have no relation.
That’s right, profit is theory and cash is reality. There’s something that lies somewhere in the middle and that’s your margins, something so easy to neglect. We so often hear and we’re guilty too of coming up with a new offer, doing a flash sale and anything else to make more sales. It’s natural, cash starts dwindling and we need more sales. That’s been drummed into us thanks to ‘sales minus expenses equals profit’ and we talk more about that over in our blog on why business owners eat last.
If you’re able to read the gauges and understand the numbers, more sales isn’t always the answer to a successful and cash thriving business.
Margin is everything
You can increase your leads, improve the effectiveness of your sales process to increase conversions and do all those great things. If the product or service you’re selling doesn’t have the right margins then optimise your sales as much as you like, you’ll be going no where fast.
There are 2 margins you need to get to grips with.
Gross Margin is sales, less costs directly attributable to those sales. Sales is obvious and some costs are, but most businesses miss out some of costs when calculating their margins. What less obvious costs do you incur which are directly in proportion to sales. Delivery and packaging costs for customers, fees for taking card payments, discounts allowed, cost of theft of products and time, all these reduce the gross margin you think you may be getting on your sales.
Net Margin is the percentage you are making on your sales once ALL costs are taken into account, including fixed costs, which are the costs that will still be there even if you make no sales at all.
What is the real problem that’s causing the numbers? Let me tell you that what you can’t see will kill you. It’s vitally important to know your numbers and to ask your FD the right questions.
How well is the business doing at converting assets into revenue?
How good are we at converting revenue into profit?
How productively are we turning profit into operating cash?
The quality of questions you ask and the understanding of the numbers will show you where to dig. Operating cash is the mother load and that’s where you want to be focussing.
Do you know what your margins are? If not, you need to scrutinise your accounts, categorise all your costs and calculate your actual profit margins, and the odds are you will discover some monsters!
Gross and Net Margins differ substantially depending on the type of business, but you should be able to get a benchmark for your industry type that you can compare your business to. If your margins are below your industry benchmark, then you need to find out why.
As an example, scope creep is a big margin monster in professional service firms and may be a reason why a firm is achieving below the benchmark margins for their industry type. Scope creep is where a fee is agreed with a client for certain work, the client ends up changing the scope and increasing the work required but more often than not the client is very rarely charged for the additional work, hence a reduction in the profit on that work.
If you don’t read all the gauges the plane will crash – getting a virtual finance director can help you understand if you keep doing x what happens and help you to read the numbers. A virtual FD will help you work through those questions and set you up for success.
In the mean time, read on to find three simple ways to power up your profits