The world of business is not just about turnover. Turnover is important, but it only tells part of the story. The real health of your business is often determined by one key word: margin.
What is meant by it?
Margin is the difference between what you receive for your product or service and what it costs you to provide that product or service. Put simply, it is your profit per sale, expressed as a percentage or amount.
There are different types of margins:
- Gross margin is the difference between sales and direct costs, such as the purchase of goods.
- The net margin goes a step further and shows what remains after all costs, including overhead, marketing and salaries, have been paid.
- There is also the operating margin, which focuses on profit from core activities, excluding incidental items.
Why is it important?
A healthy margin ensures stable cash flow. High turnover without a margin is like a bucket with a hole in it: you keep filling, but it empties.
Margin provides financial stability and room to invest in growth, for instance in innovation, marketing and staff. It also makes your company more resilient in difficult economic times. Companies running on minimal profit often have a tough time when the market is down.
How do you improve it?
Improving your margin often starts with your pricing strategy. Dare to question your value and don’t be afraid to revise your prices. It is also important to take a critical look at your costs: optimise your procurement, streamline processes and reduce waste.
Finally, you can increase your margin by adding more value. Customers are willing to pay more for quality, excellent service and unique solutions.
Common mistakes
Entrepreneurs often make the mistake of focusing exclusively on revenue growth and losing sight of margins. Discounting without understanding the impact on profits is also a pitfall.
Furthermore, it regularly fails to distinguish between different types of margin, allowing decisions to be based on wrong assumptions.
