On our home page, you’ll find the following definition about margin enhancement.
Definition: a deliberate set of actions a business takes to increases revenue and lower cost thereby improving gross margin.
At its business core, margin is defined as:
Profit divided by revenue.
P / R
So, let’s say in you are in the business of selling apps. You know that for every app you sell at $10.00, you make $6.00. So, your profit is $6.00 per unit, or in this case, 60% margin – that’s pretty good. It’s a simple way that most businesses use to understand how well they are producing sales.
Of course, this begs the question: How do you know that you make $6.00 per app? This comes down to knowing what it costs to make your product and subtracting that from the price at which you sell it. So, in this case, the market is willing to spend $10.00 on your app and your cost to make each unit is $4.00. So, $10.00 minus $4.00 equals $6.00.
Types of Margin
Margin can come in a couple of different flavors.
Gross Profit Margin = Revenue-Cost of Goods Sold / Revenue
Net Margin = Net Income / Revenue
(Net Income = Revenue – Cost of Goods Sold – Expenses – Interest – Taxes)
Where gross profit looks at the direct costs associated with getting your product or service available for sale, Net Income essentially captures all the operating costs associated with generating your sales. Net Income starts to reflect how efficiently you do all that other stuff that helps make a sale happen.
You may not have a lot to say about the cost of goods sold, but you do have a lot of control over your expenses, interests and taxes. That’s where you can make big contributions to that margin ration by getting smart about:
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Operations
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Sourcing
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Financing
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Tax Strategies (Including Training & R&D Incentives)
Operations is all about your costs and efficiencies in getting product and/or service out the door.
Sourcing focuses on what’s needed to procure the goods and services you need to fulfill your customers’ requests in a frugal, but quality-sustaining manner.
Financing is being super smart about the money you use to do all of the above and to making sure you have enough of it, and that it doesn’t cost you too much to get or use that money.
Tax Strategy is about using the tax code, laws, and some very clever CPAs and tax attorneys, to legally, ethically, and competitively take advantage of every incentive, break and regulation that can help.
It can sometimes take companies years to finely tune these elements and effectively put them to work. However, this first step always starts with someone on the leadership team, the owner, c-level leader, or other, being aware, asking the right questions, and looking for new ways to improve their bottom line.
The next step, however, is probably the most important: Creating a practice to pursue margin enhancement as a weekly if not daily practice. Just like getting up in the morning to brush your teeth, coming into the office and focusing each day, not only in revenue growth, but also margin growth is the key to sustaining the profitability of your business. As they say, intentional practice makes perfect.
Best Regards,
Ernie Arboles
Principal,
Margin Enhancement Solutions