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 [...]

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 [...]

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 [...]

You’re in business. Risks are all around you and many of them are capable of doing major harm to your business. Some could even destroy your business. This is a given. So how do you manage your risk exposures. For SME businesses this is a difficult, and often poorly managed, element of accountability. There is usually some focus on liquidity risk (having enough cash) and this is from necessity. Many SME businesses manage key risk exposures such as product risk or system risk through well developed Quality Assurance procedures. Once again, often through necessity (e.g. I can’t supply Coles [...]

Okay, you get it. You need to achieve a targeted gross profit margin to ensure your business is financially successful and generates positive cash flows. And you agree that regular reporting is the key to you being able to manage this critical measure. This will enable you to respond quickly whenever these margins fall below the target figure. You just have one problem. The margins you are monitoring are all over the place. One month your margin is 43%, the next month it is 26%, and then it is something else again. What is happening? How will you know [...]

We live in the age of flat packed furniture, barbecues and other assorted household items. How do you think you would go putting one of these together in the dark? It would be near on impossible. We also live in an age where heart surgery and other complex surgeries are commonly performed. Would you want your surgeon operating on you in the dark? Yet it is not uncommon for businesses to be managed in the dark. Well to be more accurate, they are operating in twilight where they can see the parts but they can’t see the detail. This [...]