5 Margin Considerations for Business Owners
Has your Margin gone Missing?
If we cast our minds back to 2019, life in business seemed relatively simple. Yes, there were day to day challenges of being in business – more profit would be nice, fewer challenges with staff, a little more trade, slightly better cash flow etc etc etc. but life was simple.
However, fast forward to 2023, and we’ve faced a wave of change and volatility. Dealing with the impact of Covid, Brexit, labour shortages, and high inflation has squeezed margins and created uncertainty. So, how has this affected recent business performance and what does it mean for the future?
Two years ago, rising inflation squeezed margins, causing many businesses to struggle or even incur losses while navigating the pandemic and Brexit. As inflation became embedded, price negotiations became easier, allowing businesses to pass on some inflation and restore or improve margins. Although it may seem like ‘super profits’ at first glance, when averaged over two years, returns look ‘normal’ at best.
Regarding inflation, while it has slowed in many areas, it hasn’t stopped completely. The slowdown in price increases has put significant downward pressure on sales prices, reversing the previous acceptance of higher prices and tightening margins. This trend is evident across various industries, such as the dairy sector, where milk prices have dropped below 40 pence per litre (ppl) after previously rising above 50ppl to cover input cost increases that persist. Additionally, those with variable rate loans are experiencing the financial burden of each interest rate rise announced by the Bank of England, further increasing the cost of doing business. All of these factors make future planning feel nearly impossible.
6th July 2023
Phil Mills See profile
There of course isn’t a single silver bullet that solves this conundrum for all businesses but there are five things that I think business owners should be considering.
1. Do I understand my margin?
This is essential and you need it in detail. Do you understand the cost of production of an individual unit? Have you got a detailed bill of materials? Have you factored in packaging, labour, distribution etc. If you don’t understand all of this, then you are simply hoping it will work out and that is a big gamble to take.
2. Have you told people what is special about your product?
What makes it unique? Are you effective at communicating the story to your customer? Is it the nutritional value, the quality of the ingredients, the carbon neutral production process? Whatever it is, you should be clear and so should your target market. A great product will command a higher price.
3. Have you thought about your service?
One thing that all of my successful clients have in common is a total commitment to quality of service. This helps you build and retain a customer base. If you know your service is better than the competition you can command a premium. There are limits of course but people love certainty and certainty over the quality and delivery of a product will often trump price as a determining factor.
4. Are you flexible enough?
There is no one single ‘right’ formula. You need to be flexible enough to adapt to the changes that are happening around you. In order to do this, you need warning signs to spot issues and you must respond quickly. Does your financial reporting give you the information you need to be able to do this? Does your quality control process prevent issues and is there a feedback loop that helps you improve where there are challenges? Spotting issues is fine but you must adapt to them so you know you are doing profitable work (and not hoping for profit).
5. Have you thought about all of the small things?
If you are happy that you have done everything you can to improve your margin, but you are still struggling, then are there other areas that simply have to be examined? Have card charges crept up? Is your communications contract costing you over the odds? Have you failed to notice that your bad debts are on the rise? And has your accountant raised these things with you? They should be, and you should be looking closely at what is going on.
We often talk about fine margins in life, in sport etc. Well, it’s a fine margin in business between making it a success and working really hard to find there is nothing left at the end. You cannot leave it to chance, but it is not a forgone conclusion. And help is out there – but you may need to ask.
Discover how Old Mill can support your business in maximising margins and achieving financial success. Contact us today to explore our comprehensive range of accounting and financial planning services tailored to your specific needs.