The reason I’m covering this topic is because all too often I see small business owners – mostly those in Foundation – focusing just on sales. All their activities are about getting the sale, and being paid to receive the cash (or the funds).
Whilst that is an extremely important part of your business to focus on, you need to look at your sales in conjunction with something else: your costs. And this is where margin comes in.
It is the margin on your sales that pays for all the overheads in your business, and will enable you to run at a profit, or a loss. I know this sounds glaringly obvious, but it is easy to lose of this, particularly in the chase to get the sale.
I once had a client whose driving goal was to hit a million in sales. In her quest to do this, she lowered her fees more and more in order to acquire more business. She made the million dollar mark in sales, but because her fee-cutting strategy had enabled her to bring on so many new clients, it also resulted in her business being so cash strapped that she couldn’t employ more consultants to manage the increased work load.
Let’s keep the numbers simple with a couple of examples:
Let’s say your turn over 100,000 a month in sales.
Your overheads (or indirect costs) are around 30,000 a month.
Your direct costs are those costs directly associated with your sales such as raw materials, the people who deliver services you sell, or wholesale product costs for example, are also referred to as your cost of goods sold (referred to as COGs).
In this example you have 100,000 in sales.
You also have 30,000 in overheads or indirect costs.
So, after you’ve paid for your cost of the goods or services you sell, there needs to be a minimum of 30,000 left to cover your overheads.
So if you sell 100,000 worth of products or services, your margin must be 30,000 or more to cover the rest of the expenses in your business. Your margin must be no less than 30%.
What affects your margin?
If you sell less, you won’t be able to cover 30,000 of overheads, because 30% of anything less than 100,000 in sales is not going to be enough.
If your cost of goods increases your margin will reduce.
If your overheads increase, you will need more than 30,000 in margin to cover them.
On the flip side, increasing sales, reducing cost of goods and reducing your overheads will all increase your margin.
So, you really need to know the numbers in your business:
- What are your overheads that need to be paid every month?
- Do you know what your cost of goods are or what they need to be to cover your expenses
- What does that equate to in terms of how much you need to sell each month?
And in this podcast I’ve used interchangeable terms like indirect costs, overheads, expenses to mean the costs in your business that are not part of the cost of selling your product or service. Other terms I’ve interchanged are direct costs, and cost of goods sold to mean to actual cost to make and deliver your product or service.
Whilst the amount you sell is important, the amount you keep is even more important.
For those of you who don’t have a head for numbers, you must learn to get your head around margin if you haven’t already because it underpins the results you will have. It is one of the most important variables in your business and deserves as much attention as you can give it.
Remember, better strategy, better business, better life….until next time…..