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Minding Your Margins

If you want your business to be successful, it needs to be profitable. And if you want it to be profitable, you need to know and understand a little something called profit margins. After all, if you aren't bringing in money, the bills don't get paid, and that story, my friend, is one that never ends well. 

In very simplified terms, a profit margin is a percentage of how much profit your business generates per dollar of sale. Example: If you have a 30% profit margin, it means you're netting $0.30 of income on every dollar. 

To arrive at this percentage, start with your revenue and deduct the total cost of goods sold, expenses, interest, and taxes (Your net income). Divide that number by the original revenue amount, multiply by 100, and alakazam, you have your profit margin and a clear picture of how your business is fairing. 

As a business owner, it's important that you get - and stay - very, very familiar with your profit margins. We're talking-Tommy Lee and Pam Anderson with a video camera-familiar. There shouldn't be any secrets or surprises. Having this kind of familiarity will enable you to make wise and rational decisions when it comes to protecting the profitability and sustainability of your business, as well as course-correct when you see that percentage slipping. Your margins should act as a metric but also something you use to analyze and evaluate. 

How can you improve profit margins?

Don't fall into the trap of thinking, "if I just sell more, I'll be fine." That might not actually be the real issue if you're hemorrhaging money elsewhere. Instead of just slapping a bandaid on the problem and praying it goes away, here are some useful tips to help you mind your margins.

  • Regularly reevaluate what you charge, but don't jack up the prices for no reason. Yes, in theory, making customers pay more would give you a better profit margin, but it could have the opposite effect and drive them away. You may find you need to start charging more for legit reasons (looking at you, inflation) but make sure you do it strategically. 
  • When you're analyzing your prices, consider what else you can offer that's of value that could help justify the increase in the eyes of your customers.
  • While you're at it, think about upselling and cross-selling. How can you increase your average order value?
  • What are you offering that has a low-profit margin? If a particular product or service takes up a lot of time and energy and generates very little profit for your bottom line, consider pulling the plug if it can't be salvaged.
  • Reduce your overhead. Can you work out of a smaller space? Can you renegotiate your lease agreement? What about your employees? We don't like to talk about letting people go, but tough decisions need to be made if it affects the bottom line. Are there any tasks you can outsource rather than paying for them in-house?
  • Be militant about tracking your expenses. You should know where every dollar and nickel is going - that's the only way you'll learn how and where to cut costs.
  • Renegotiate your contracts with vendors. See if they'll offer discounts for purchasing in bulk or extending the length of your contracts. It never hurts to ask, right?
  • Focus on efficiency, streamline your operation, and reduce waste. Sometimes it comes down to throwing out the playbook and making a new one. If you can deliver the same product or service in a more efficient and less wasteful manner, your profit margins will reflect that. Just don't cut corners and sacrifice quality in the name of the almighty dollar. Your customers will notice.


Bottom line

Big, sweeping changes aren't always necessary to improve your profit margins. Some of the examples we shared above will require a bit more legwork than others, but instituting one or two of these can significantly impact your bottom line. Minding your margins should be a regular practice if you're serious about growing and sustaining your business.


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