Your business is enjoying growing sales, but you’re frustrated every month when you see your profits are stagnant or even shrinking. If this sounds familiar, you’re probably a victim of profit margin killers that are draining your business’s lifeblood.
Margin killers are oversights and inefficiencies throughout your business that may seem small on their own but together can make the difference between a flourishing company and one that struggles to survive.
The ability to eliminate margin killers is what separates the best companies from the laggards in every industry.
So how do you fight margin killers? The first step is to get a clear understanding of how profit is measured using your financial statements.
Two ways of measuring profit
As you can see in the income statement example above, there are two measures of profit.
The first is the gross profit. It reflects the amount of money a company has left over after accounting for its direct costs to make a product or deliver a service. Direct costs include labour, materials and other expenses that are directly related to producing a product or service. In this example gross margins (which are gross profits as a percentage of sales) are 66 per cent of sales.
The second, net income, is a more comprehensive measure. It takes into account not only your direct costs but also all your other expenses, including overhead to operate the business, taxes and interest paid on debt. After reflecting overhead costs, the net income margin is only 12 per cent of sales.
You can see there are layers of expenses where margin killers may be lurking. But it’s not only unnecessary expenses that can hurt your bottom line. You may also be failing to collect all the money you should from your customers.
The key to reducing and eliminating profit killers is to be able to dissect your financial statements and highlight the areas where you are losing money and see what strategies you can use to prevent cost and revenue leakage.
With this in mind, let’s look at five margin killers and how to eliminate them.