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Know your Margins

Posted 6 March 2013

It seems an obvious thing to say… indeed it is an obvious thing to say.  As a business owner, if you don’t know your margins, then how can you be sure you’re making money ?  So – do you know them ?

Sadly, more than half the business owners I meet don’t.  Some can tell me what their previous year’s accounts told them it was … about 20 months ago.  Many don’t understand the difference between mark up and margin.  This is not a criticism, it is simply that they have never been taught how to measure it, and why it is important.

The fact is, in most businesses, different products carry different margins, and each customer or customer type also generates their own margin mix.  By knowing and understanding which products and which customers make them the most money, business owners can better target their marketing, sales, promotion and customer support to boost their bottom line.  It gives them more certainty when negotiating with suppliers and customers alike, by knowing the point at which they should walk away and find an alternative, instead of signing up to a “too-good-to-miss” opportunity that simply turns them into busy fools.

What’s more, by knowing your margins you will be able to make reasonable, rational decisions about discounting.  I’ll blog again about the dangers of discounting, but once you know your real numbers the point really does get driven home.

So, ask your accountant, or find yourself a switched on management accountant or bookkeeper to help you out … once you’ve opened your eyes to where you make your money, you may find it much easier to break some  of the unhelpful habits you have now .