Margin for success

Margin for success

November 30, 2009 by Adam Ewart

Margin is probably the most crucial figure in any business. Tell me your turnover, your margin and your running costs and within seconds I can tell broadly whether your business is a triumph or a disaster.

In the past, I was obsessed with mark up. It sounds great saying product X is marked up 1,000 per cent and this one 500 per cent, but it doesn’t provide the immediate overview that margin does.

Margin is basically your gross profit as a percentage. This means you can quickly work out your gross profit on any amount of sales – which you should do every day.

How do you calculate margin? First work out your gross profit, which is selling price minus costs. Then simply divide this figure by your selling price and you’re left with your margin.

I run Karacha.com, an online shop that sells musical instruments. So, as an example, if I sell a violin for £200 that costs me £110 to buy from the manufacturer, my gross profit is £90. If you divide this by my sales price (£200), my margin is 45 per cent.

So what makes this margin number so important? Well let’s assume your margin is the same across all products and the business costs £200 to run per day, that includes a wage for yourself, rent, electricity, etc. Secondly, let’s assume your business sells £300 on Monday and £650 on Tuesday. This is where the margin comes in.

Whatever your margin figure is, stick a zero and a decimal point in front of it, so for 45 per cent it would be 0.45. Now grab your calculator and hammer in 0.45 x £300 and you should get £135.

This is your profit for the day before daily costs. Previously, I said the business costs £200 a day to run, so unfortunately you have a loss. But do the same for Tuesday 0.45 x 650 = £292.50. On Tuesday you can pay your £200 bills and have £92.50 profit left over.

By knowing what you make on a daily basis you can make the necessary adjustments to ensure you make a good profit every day.

Turnover is vanity, profit is sanity

Too many people are scared off by the calculator – and businesses suffer because of it. As long as you know your margins, you’re always just 30 seconds away from a quick and accurate assessment of your business.

You could be selling £10k a day, think you’re the absolute dogs you-know-whats, but be making no profit. Every day, multiply that sales figure by your margin and see what you’ve actually made (don’t forget to take away your costs). It’s absolutely crazy, the amount of people who do not know their margin and therefore their daily profit, but can quote their turnover for the past 12 months.

Final thoughts. High costs and low margins lead to disaster: high margins and low costs could lead to a lovely yacht in the Caribbean. Good Luck.

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Comments

I also agree that cash is so vital to business survival. There have been many cases of profitable business filing for bankruptcy due a lack of cash or the bad timing of cash receipts.

Emma // Cheap Accountant

A very explanation of margin, but the first comment is correct and for any business cash is key to survival. You can book a profit but without the cash takings/receipts you won't be able to pay your bills as they fall due.

Mike Rowe // cheap accountant

What a clear explanation of a most important measure! I guess cash is the other thing that knackers small businesses, if they don't keep an eye on it.

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