The number 1 piece of advice I give to business owners is – know your margins. No matter what kind of business you are in you need to know how much money it is costing you to deliver each $1 of revenue.
And this advice applies regardless of your stage of business or what kind of business you are in.
Services business
Whether you are a solo operator or run an agency or professional services firm you need to have an eye on margins to ensure that you are delivering your jobs profitability and covering overheads. Some points to consider
- Do you have target utilisation rates for your billable staff and do you monitor actual utilisation against this?
- Do you have a rate card for your staff that works out their cost (taking into account unbillable time) and has a target profitability associated with them
- How do you monitor actual vs budgeted effort to make sure that scope creep is managed and further fees are requested if additional work is undertaken
- How do you factor overheads into your rate card to ensure they are covered?
- Do you know your breakeven level of sales?
Product business
A common mistake here is not factoring in all the costs involved in the final product
- Do you know how much it costs to produce each unit?
- Have you factored in packaging and shipping/logistics costs into this?
- Have you factored in your time to produce?
- Do you know your margins for wholesale vs retail?
- How much of a margin do you make per unit or product line?
- What level of sales do you need to make to ensure that margin covers your overheads?
- Plan for promotional spend and make sure your price allows you scope to reduce and still meet your average target margin.
Early stage/start up
Even when you are in the early stages of a business, when it might all be about customer acquisition, ultimately you need to know that you are building a business that is sustainable.
- Have you worked out your unit economics?
- If your business requires upfront investment to build your customers do you know how many you need to breakeven?
- As you start to acquire customers are you reviewing your unit economics now that you have proof points in your data?
Business preparing for sale
Knowing your margins and having clear data to back up your statements is critical when preparing your business for sale. Often margins are “known” based on gut feel and historical data that may not be borne out in current figures
- Are you reporting systems set up to clearly show margins by customer, products or divisions.
- If your forecasting model is showing margins in a certain way do your actuals also align with this?
How confident are you with the margins in your business today?