You don’t have to be a financial genius to know that profitability starts with margins. Margin in this case meaning “gross profit margin” which is the amount by which the selling price of the product exceeds the cost (all costs) to produce it. You need this margin because without it you won’t be able to pay overheads such as rent and administration expenses. This might be a slight over-simplification, but it makes the point that you must mark up your product with sufficient margin to run a profitable business.
BDC once put out an excellent document for small business in which they briefly discussed five profit margin killers that they say must be eliminated. Obviously you should do more reading and research on these items if you are to fully understand the essential details about margins, but in the meantime, here they are:
- Pricing that doesn’t reflect true costs.
- Holding onto unprofitable products.
- Failing to manage customer relationships.
- Allowing direct and overhead costs to grow uncontrolled.
- Failing to use technology.
This is an important topic fundamental to running a profitable business. It’s well worth spending the time to come to grips with it.