This is all about protecting your margins. There are three situations that come to mind that come from “How To Sell At Margins Greater Than Your Competitors” that can derail a business when it comes to margin deterioration.
Situation #1 – Cutting Prices to Sell More of Something
Most small and midsize businesses operate at a 10% net profit margin. In fact, I would bet that 80% of small and midsize businesses make between 5-15% net profit margin (Based on nearly a decade of working with this market). Thus, when gross margins decrease by 1 PERCENT when a business is making 10% net profit margin, the result is not a 1% change in profit…
It is a TEN PERCENT CHANGE in profit:1% CHANGE / 10% NET PROFIT = 10% CHANGE IN PROFIT.
Oftentimes I am brought in by small and midsize businesses struggling to find out where is all the money going… The verdict usually is margin being sacrificed for sales. PS: This also negatively effects your working capital needs as your retraining less dollars for sales, so you need more working capital to finance additional growth.
Situation #2 – Failing to raise prices when costs go up
Prices are generally always increasing. In fact, it is the Federal Reserve Bank’s policy for prices to rise at least 2% annually.
This implies that if you do not raise your prices at LEAST at the rate of rising costs, you will be out of business in short-order.
Remember 1% = 10%?
It does not take much to generate a loss if you do not keep an eagle eye on this. I recommend looking at this monthly, but as part of a trailing average to spot trends and reverse course where necessary.
Situation #3 – Failing to raise prices by the same percentage of cost increase
A lot of people miss the math on this.
That is, most people assume that if they raise their prices by the same amount of dollars that their costs go up, that they should be OK.
The reality is that the math doesn’t work out like that.
In order to protect margins, you must increase prices by the same PERCENTAGE of price increases.
That’s all from the Professor this month. If you are curious about next steps on how this applies to your situation, then take a look at our “Stairs of Success” – hope to see you at the top!
Ok, so now you know about the consequences of not protecting your margins. Now, let me shift gears a bit –
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ABOUT THE AUTHOR: Joe Gallegos has created tax strategies and operating systems for businesses that have saved taxes, increased cash flow, and profits. As the Managing Partner of Tax and Consulting for JAG + Argueta CPA Firm , Joe has taught hundreds of business owners his step-by-step strategies for creating their own success and obtaining more time and more profits. For more profit creating business tips, tactics and strategies, sign up up for our tips here.