A Matter of Margins - Sales versus Margins

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"Adam, over the past six years, I've had the pleasure of 'bumping into you' on at least three business and marketing related forums. Your contributionsto discussions have always been courteous, astute, incisive and practical,delivered with good humour, and based upon 'real-world' business experience. You are clearly an experienced business professional who actually knows what he is talking about. I wonder if your clients know what a gem they have in you? As one business professional to another, I salute you.

Good Wishes,
John Williamson - The Wealth Coach
www.thewealthcoach.com
www.retaildisplaysecrets.com

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I just LOVED "7 Clues to a Profits Leak".

Steven Walker - Profit Improvement Advisors
Calgary, Canada

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You will be proud how your protégés are proceeding! We have expanded the business to Katherine and Alice (Tennant is also on the list). T he catering side of the business is far less stressful and is actually profitable, now that we only take the good jobs.
We will never forget the assistance you gave us in re-inventing our business!

Karen Sheldon

Managing Director

Karen Sheldon Catering

Darwin, Australia

+++++++++++++++++++

The chap is Adam Gordon whom I have known for many years. He is a former resident of Darwin having lived here for perhaps 25 years, is an excellent communicator and has a very good appreciation of small business, business plans and all that goes with it. In fact Adam is regarded as a business guru.

Charles Wright, QS Services, Darwin, Australia

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Thanks for the catch-up the other day. It's great to be working with a legend in the small business community.

AJ Kulatunga, BLKMGK ICT

Darwin, Australia

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The 7 Clues is a great.

What I like the most in the Seven Clues report is that it clearly explains that accounting is merely a subset of proper financial management and

that only the business owner can practise financial management. The accountant does the accounting, and in doing so supports the business owner's financial management. And the business owner uses the accountant's information, but relying on the accountant to do full-blown financial management is short-sighted.

The report nicely "grounds" an otherwise complex topic which many business owners are afraid of touching, so they often move ahead in blissful ignorance. The water hose and the soggy soil under the leak makes an excellent and easy-to-comprehend example, upon which the financial management concept is nicely built.

Tom "Bald Dog" Varjan, Organisational Provocateur Dynamic Innovations Squad
Personal and Firm-Wide Performance Improvement for Management Consulting Firms

Vancouver, BC Canada

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You have played a very important role in my development in business.

You were there with the right information at the right time, I thank you for that.
By adding the next level of systems, and marketing knowledge that you brought to the table we able to identify our objectives, acknowledge the gaps in our business and put in place the planning so as to achieve those objectives. Within 5 years we achieved 9 of our ten stated objectives. In that same year we won the NT Telstra Small business of the year"

Greg Haigh
Director - Trade Group
Regional And Northern maintenance services
RANms

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A Matter of Margins - Sales versus Margins

Sometimes we lose sight of the difference between margins and sales.

The margin we make over the cost of providing a product or service is the money we have to contribute to pay overheads (relatively fixed) and then when we have covered those, to our profits.

I'll talk about breakeven another time but this time I wanted to touch upon two examples where it is easy to get confused by the impact of sales versus margins. These are bad debts, and promotional campaigns.

Lets take bad debts first. Of course this does not apply to you if you get cash payments on delivery, or better still, payment before delivery. A significant proportion of businesses invoice their clients on delivery of the product of the service. Your Terms of Trade may vary anywhere between 7 days to 6o days. Here I'm talking about when you require payment, not when you actually get paid. Unfortunately we often find that the bigger the client, the slower the payment. So what happens when we have a bad debt?

Say your sale was $1,000 and your Gross Margin was 35% ($350). The sale goes bad for what ever reason and the client does not pay. Now it is easy to assume that you have to make another sale of $1,000 to recover your position. Easy to assume, but wrong!

To get back that $1,000 you have to make enough profit to get the money back, because a significant proportion of the new sale will, as before, be the cost of providing the cost or service. And that amount we can calculate by dividing the sales figure ($1,000) by the Gross Margin (35%). And that gives the princely sum of $2,857, all of which ignores the cost and effort of achieving the new sale.

So it makes sense to set yourself up so that this situation does not arise. Policies and procedures help, as does getting paid up front, or at least a reasonable down payment. In these days of multiple credit cards, securing a credit card imprint can be useful. In other words get the client or someone else to cover the debt. You are not in the banking business.

And so to promotional campaigns. Much the same situation applies, except that it is harder to measure.

If you do decide to calculate return on a marketing campaign: when comparing cost to returns, "returns" should be your profit not your gross sales. If you spend $1,000 on a marketing effort and generate $1,000 in sales, you are losing money; you are out the cost of product or services that you sold for $1,000. You have only broken even on a marketing campaign that costs $1,000 when you have sold enough product or services to generate a $1,000 PROFIT. How much sales that requires depends completely on your products and your profit margin.

r& i ag2 AdamG