Know your margins and the story they tell. Learn more in our series Getting Started with Biz Intel.

If success gurus had to name an enemy, lack of margin would be at the top of the list. Most of us are running ragged from dawn to dusk. We think a packed schedule will produce the success we dream about. But successful people (and gurus!) disagree:

“Successful leaders and entrepreneurs who actually create results in their lives know that slowing down builds the foundation for their success.”

Source: Inc. Magazine

 

That’s what knowing your margins is all about. You need a strong sense of the difference between being busy and being effective, because those are definitely not the same things.

Knowing your margins in the financial management sense is just as important. This is the fine line between profitability and loss. Margins tell a story about your business. So you’ll want to pull up a chair and to hear what it’s saying. Knowing your margins is one more piece of powerful business intel covered in this Getting Started with Biz Intel blog series. Let’s take a look at the info you can glean by knowing your margins.

KNOWING YOUR MARGINS 

Before you can listen to the biz intel of your margins, you have to know where to find them. It’s all in the three sections of your Profit & Loss Statement.

Section 1: Revenue

Ideally, your business will allow you to get paid to do what you love most. You can create a healthy, successful business for whatever you are passionate about, from grooming dogs to writing code to caring for the elderly. Whatever money you make is listed as revenue on your P&L.

Section 2: Cost of Goods/Services

Most businesses will need to spend some money to create products or provide services. If you are grooming dogs, you’ll need to buy shampoo and supplies and pay someone to groom. All the direct expenses incurred so you can make money are listed as COGS on your P&L. 

Section 3: Overhead Expenses

Businesses also face expenses even if no products are created or services are provided. These are the monthly bills for things like rent, tech, insurance, and so on. All of these operational expenses are listed as overhead on your P&L.

CALCULATING MARGIN

With your P&L now in hand, you are ready to calculate your profit/loss margin using the following formulas:

Gross Profit = Revenue – COGS

Gross Profit Margin = (Gross Profit / Revenue) x 100

Net Income = Gross Income (Revenue – COGS) – Total Expenses

Net Income Margin (or Net Profit Margin) = (Gross Income/Revenue) x 100

LEARNING FROM YOUR MARGIN’S STORY

Once you’ve found and calculated your margin, it’s time to lean in and listen. What is the story your margin is telling you?

If your margin is healthy, you have a profit! But that’s not the end of the story. You need to track your profit margin over time to see which way it’s trending (month to month, quarter to quarter, and year to year). When trends change for better or worse—or if they are stuck—you need to listen up. A positive margin that’s growing may mean you should keep on keeping on, while one that’s positive but decreasing over time may mean there’s trouble ahead. Watching the trend, even on positive margins provides key insights for wise financial management decisions.

If your margin is non-existent, you have a loss. Changes are needed, whether that’s in distribution or vendors or staffing or operational expenses. You’ll need to dig deeper and discover what’s contributing to the margin loss.

TRACKING MARGINS

One way to track changes in margins is to take regular measurements so shifts can be detected sooner than later. It’s like taking your temperature each day. When you track your temp over time, you see the normal fluctuations, so when your temp begins to climb, you notice it right away. When it comes to profitability, time is of the essence. Regular tracking keeps you tuned into your business, ready to address problems before they escalate. That’s what Key Performance Indicators do.

“Key Performance Indicators (KPIs) are the critical (key) quantifiable indicators of progress toward an intended result. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most.”

Source: KPI.org

 

For our clients, we recommend setting five KPIs each quarter, and tracking them monthly—three standard and two custom: 

  1. Revenue
  2. Gross Margin
  3. Profit Margin
  4. Custom KPI #1
  5. Custom KPI #2

For example, let’s say your gut is telling you that commuting is eating up way too much of your profit. You can choose gasoline as a custom KPI for a few months. Keeping an eye on this KPI gives you a better sense of the drain it may be having on your business and prompts you to investigate more profitable options. 

YOUR MARGIN POWER

Making more profitable decisions is the point of tracking your margins. You need to adjust your activities and spending plans based on the story your margins are telling you. It’s not always easy to track the story embedded in your margins though! That’s why Officeheads works with successful CEOs and business owners to get the story straight from their margins. Great decisions are possible when you have all the biz intel you need to make sound decisions year after year.

We bring your entire company into the biz intel game, using our signature 5-gear financial management approach. Reach out today to see how the team at Officeheads can put your biz intel to work for an incredible 2023.