Experts Blog

Margin for success

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.

Guerilla tactics

I’ve always felt that there were two types of startup – those with too much money and those with too little. I’ll leave the topic of too much money for another day, and instead think about the more common problem of having too little money.

When you’ve got too little money, the key is not to spend a penny you don’t need to, and to make sure that every penny you do spend is effective. That’s pretty much common sense, but I think that it’s worth drilling into much more deeply.

One of the pitfalls when starting a business is mixing up the keys to business success with the stuff that has to be done as you become successful. In start up mode, all your effort needs to go into the former and virtually nothing into the latter.

A business bank account, business cards, business premises and the services of an accountant can all be vital ingredients – but not if your business isn’t yet making any sales.

Your efforts and resources should go into working out your business proposition, finding customers and delivering that proposition to them. Make sure that you keep 100% accurate records, and probably set up a limited liability company to protect you from personal bankruptcy, but otherwise focus on starting to make sales and money.

When I set up SellerDeck (formerly Actinic), providing ecommerce services for SMEs, we had two vital objectives. We were trying to sell critical technology to small companies and ISPs, and we also needed to raise funds. I renamed my house “Actinic House” which was perfectly legal and cost nothing. I also joined the Institute of Directors and met all prospective investors in the IoD offices in Pall Mall.

These are the sorts of techniques that I would describe as “guerilla” – getting to your objectives by low cost and unconventional means. You can find all sorts of ideas both online and from other successful entrepreneurs. You won’t get them from the bank manager or the accountant, these techniques tend to be anathema to them. But it’s these that will help you to succeed, not having leather bound accounts.