Understanding margins is the cornerstone of any successful business strategy. Signature Analytics’ CEO, Pete Heald, and President, Jason Kruger, recently emphasized the importance of deep comprehension of your business’s margins, the influences that shape them, and the opportunities they present for improvement.
Why Knowing Your Margins is Essential
Margins, the difference between the selling price of a product or service and its cost, are a primary indicator of a business’s profitability. It’s not enough to understand the overall margin; businesses must also grasp the margins for individual product or service lines. As CEO, Pete Heald points out, having this understanding allows for effective measurement and goal setting.
Increasing the gross margin – the profitability after subtracting cost of goods sold (COGS) – even by a single percentage point can lead to significant improvements in a business’s bottom line. In a $10 million revenue business, for example, a 1% improvement in margin equals an additional $100,000 in net income. That much additional cash on the bottom line can make a huge difference in how a business makes decisions about inventory purchasing, hiring and workforce planning, real estate costs and many other operational choices.
Understanding Your Trends
Margins, much like other financial parameters, can trend upwards or downwards over time. Businesses need to mine these trends for the valuable insights they provide. A decreasing margin might signal a need for proactive adjustments, while an improving margin could indicate the effectiveness of certain strategies.
For example, if a $10M business can increase the price of a product by 2% while COGS remain the same, they will see an additional $200,000 bump to the bottom line. Understanding the details that drive these dynamics allows a business owner and leadership team to make strategic decisions to improve gross margin and profitability.
Beyond Gross Margin
Improving gross margin is only part of the puzzle. Businesses must also focus on managing their Selling, General & Administrative (SG&A) expenses to improve their net income margin. CEO, Pete Heald emphasized that the key to managing SG&A costs lies in understanding your numbers, trends, and what constitutes your margins by service or product line.
Once businesses have a firm grip on their margins, they can explore various strategies to enhance them. This could include sales strategies, purchasing strategies, or re-evaluating shipping agreements to name just a few. For businesses that manufacture or buy products, these elements can significantly impact margins.
Ultimately, the importance of margins cannot be overstated. They’re an essential part of the financial health of any business. As President, Jason Kruger stresses in the video above, small improvements of even 1-3% can make a substantial difference to a business’s bottom line, reinforcing the importance of not just understanding your margins, but also continually striving to improve them.