26 04, 2018

What margin should we target?

By |2022-06-22T14:34:34+10:0026 April 2018|

Over the years I have been asked this question on many occasions. The enquirer is looking for a number but the number depends on many factors. So the answer is to explore a range of principles that apply to these factors. Let’s look at this for both from the “gross profit margin” and the “net profit margin” perspectives. Gross profit margin The first issue to explore is how vertically integrated the business is. From procurement through production/delivery through to sales & marketing. What activities is the business responsible for and how complex are these activities? The growth phase the business [...]

19 04, 2018

Gross profit explained without numbers

By |2022-06-22T14:30:59+10:0019 April 2018|

How front of mind is the meaning of gross profit for most business managers. If asked to describe what gross profit is, they would invariably say it is sales revenue minus cost of sales. Of course that is correct, but what does it truly represent? For me, it represents a measure of customer value created by the business in the reporting period. Another way of describing this is that it is a measure of wealth created by the business. As such, it is the most important measure for the business to focus on. Why do businesses exist? In the [...]

5 04, 2018

Don’t assume when making assumptions

By |2022-06-22T15:14:00+10:005 April 2018|

Planning is one of the key drivers of success in business. We all know that a proactive management approach is critical for achieving successful outcomes. A key element of your business plan is the financial plan, or forecast. This is used for budgeting purposes. For a budget to be a valuable performance management tool it must be based on the drivers of financial performance. It must be constructed from the ground up. For example, your revenue forecast must include: The volume of sales in each products/services category Where will they be sold (markets) What channels will they be sold [...]