Analysing Margins To Boost Profitability
Margins can be a bit tricky to get your head around. What seems like it will offer you a better profit margin may not, while others may surprise you.
In this video Helen breaks down how to analyse margins effectively to boost business profitability. Including some tips and tricks for what to consider alongside the figures.
“Analysing margins is a brilliant way to boost your business’ profitability. Imagine for a moment that you’re selling two different products, and here we have the selling price of those products.
Example: Product A VS Product B
Product A is being sold for £80. Product B is being sold for £100. If we simply use this data, we’re going to assume that product B is going to be more profitable for us because the selling price is that bit higher. On its own, that makes businesses fall into a trap and actually what we want to do is to use better information, so that we can really drive that profitability forward.
To do that we need to know more about the margins. In order to work out our margins we need to understand what our cost of sales are.
We have some cost of sales data for each of those two products and when we take that away from the selling price, we can work out what the margins are.
Product A: We’ve got a margin of £50 once we’ve taken our £30 cost of sales away.
Product B: We’re going to make £30 once we’ve taken our £70 cost of sales away.
We can clearly see that although we’re selling our second product at a higher value, the first product is actually more profitable. We want to use this to drive our business forward.
We need to focus our efforts on promoting product A to help us make more profits ultimately for the business. We don’t want to use this data on its own. We need to think about some other non-financial factors.
Non-Financial Factors To Consider
The financial factors are telling us that product A is going to be the most profitable, but what we have to consider are things like “Is the market capacity sufficient to sell more product A” and “What are our competitors doing? Are they doing something that’s going to restrict our ability to sell more of that product? Is product A in a growing market is it in a shrinking market? Is selling more of this, driving our business towards it’s strategic goals?”
We need to consider all of those non-financial factors alongside our margins data. But I hope you can clearly see why margins data is so important in helping our business to drive towards profitability.”