Why you must protect your margin
Irrespective of the sector you’re in, protecting and improving margins are vital in managing your cash and enabling you to grow. Margins are affected by many different factors and vary between industries. Not all will be within your control.
Successful businesses protect margin above everything else. Whilst seemingly obvious, many SMEs focus on sales and wonder why they find themselves working ever harder and juggling cash, only to break even or worse.
Many companies are under severe pressure from rising labour costs, higher shipping prices, shortages of raw materials, spiralling energy prices, and economic inflation, which is predicted to keep rising this year before falling back in 2023. So, in the face of this onslaught, what are your options?
The most obvious ways to improve margin are to raise your selling prices or fees, and to sell more without increasing your cost base. I can hear the groans. Who is this simpleton? But don’t be dismissive too quickly. Companies you will know, indeed some of your competitors, are already doing it and reaping the rewards. Often, core clients provide a steady revenue stream, but at unsustainably low margins. Analyse where you are making money and where you’re not. Decide whether you are keeping customers with low margins for strategic reasons or purely out of habit. If the latter, you should steadily increase your prices. If you get pushback, work out if you are better off without them.
If this won’t work for you, you must at least resist the temptation to lower prices. Changing suppliers or contractors is a hassle for most companies and the effort will be hard to justify if the potential savings are small, so don’t capitulate to pressure. Make sure you focus on reliability, quality and service delivery. You may have the ability to add further differential to your product or offer, which will make direct comparison difficult.
Your management team also plays a part. Companies able to demonstrate a disciplined approach to processes and control, and especially those with a culture of continuous improvement, are likely to generate and maintain better profit margins than those that don’t.
Identify your products or services that deliver the highest gross profit margin. Unprofitable products or services should either be dropped or modified to generate better margins.
Separate your essential costs – the ones that support your key business differentiators, enhance customer experience and fund development of new value propositions – from non-essential spend, which you should cut back or remove.
Spend time looking at your variable costs. Logistics is a prime example. Although shipping prices are beginning to stabilise, they remain extremely elevated in comparison with pre-Covid rates. Fuel costs are still high, so if, for instance, you run your own fleet, you should be getting creative with your routes.
More robust sales forecasting may enable you to purchase raw materials or finished goods in larger quantities or different frequencies, helping to reduce costs and increase your margins.