Why Margin Matters When You’re Running A Small Business

business, small business, profit, loss, risk

Everyone has their own, subtly different parameters for success. For some, success means having a job that gives them fulfilment and a work / life balance. For some, it means being able to spend more time with their kids and being the best parent that they can be. Some may see success as a commodity that’s measured in gross income, while others may argue that one cannot be successful if they don’t have freedom in their working lives. Whatever your definition of success, you may have found that it’s getting increasingly difficult to achieve in the corporate job market. It can seem as though opportunity is an illusion, and that every job application you make is met with frustration and failure, every opportunity for promotion seems to elude you and that you’re stagnating in your job and your career. Rather than allowing your skills to atrophy as you worked for an employer who would never appreciate your efforts, you decided to set up your own business.

But as you navigate those perilous early years, you may find that you have to rethink your parameters of success. Indeed, sometimes it may feel as though success is getting from one month to the next without shutting down. Indeed, because are so many performance metrics and Key Performance Indicators (KPIs) to keep your eye on, it can be hard to accurately gauge your success or failure. But when it comes to metric, don’t lose sight of the one metric to rule them all…

We need to talk about margin

When you’re running your first small business, it’s easy to assume that your revenue / turnover is an accurate measure of how well (or how poorly) you’re doing year on year. After all, if the amount you’re bringing in is steadily rising, that can only be a good thing, right? Well, not necessarily.

A high turnover can be misleading, and some consider it a “vanity metric”. It may be offset by rising expenses and wasteful spending. As such, it’s far more important to focus on your margin. Your margin should be your primary focus and all your other metrics should be considered through the lens of how they relate to your margin. If you’re making a lot of money but have low margins, you can’t be profitable. And if you’re not profitable, it’s only a matter of time until your business runs out of steam. If your expenses and debts equal and eventually exceed your revenue, your business will become insolvent, and will have to go into liquidation.

But even when you’re mindful of margin, you may still have trouble turning a profit. While it takes many businesses at least 2-3 years to become profitable, you should ask yourself the following questions to see if you’re doing all that you can to improve your margin.

Are you spending enough time planning?

Where do you spend the majority of your time during your working day? Do you spend it at the proverbial coalface with your team? Or do you spend it in your office planning and strategizing? While there’s certainly nobility in spending most of your day working shoulder to shoulder with your employees, it’s all too easy to fall into micromanaging behaviors. And there’s ample evidence to suggest that micromanaging harms employee productivity which in turn can damage your profitability. Your time is far better spent in your office looking at all the data available to you to determine not only whether or not you’re profitable at any given moment, but how you will increase your margin over time.

Is everyone pulling in the same direction?

Speaking of data, even small businesses can find themselves drowning in Big Data. Many of today’s entrepreneur are savvy enough to collect data, but not all are adept in mining it for actionable insights. The kind that lead to change and profitability. Furthermore, you may struggle to articulate to your team how their day-to-day actions contribute to your profitability and the health of your business. As in all things, technology can come to your aid here.

Investing in Business Intelligence software can help you to get the insights you need and communicate trends clearly to your team, so everyone’s pulling in the same direction.

Are you taking steps to maintain cash flow?

Margin isn’t just about how much money you’re making. It’s about how well you mitigate and manage expenses. That’s not to say that you should be wary of spending. Far from it. Under-invest in your business and it can be impossible to break through the ceiling placed on your profitability. It does, however, mean that you need to be proactive in maintaining your cash flow, identifying areas of wasteful spending and being aware of how to liquidate assets should the need arise.

Over-ordered on printer toner? There are places where you can sell toner cartridges and free up cash that can be better spent elsewhere. Bulk bought some inventory that just won’t shift? Throwing a flash sale might result in a short term dip for your margins, but allow you to invest in capital investments which might make your business more profitable. This might be a new piece of equipment that makes your operations more efficient, moving to a premises that’s better located or taking on a new employee. Maintain a healthy cash flow and it’s easier to take control of your margins.

It’s okay to play the long game

When it comes to margin, don’t fall into the trap of trying too hard to boost your profits straight away. It’s perfectly acceptable to play the long game. Indeed Amazon only started making serious profits recently and was in the red at several points over the past decade. Why? Because they were making serious infrastructural investments that started to pay off in serious ways over the past couple of years. As long as you have your eyes on the prize and have a plan to inflate them, it’s okay if your margins are temporarily slim.

Whatever your plans for the future, keep an eye on your margins and you’ll be much better equipped to achieve them!

 

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