Episode 4: Cash is King but Margin is Queen

Whilst sales revenue is a critical part of growing your business, margin is the variable that will make your company profitable or become cash-strapped over time.

Upscaling must be profitable in order to be manageable, and the only way to ensure you run at a profit is to focus on margin.

Margin overall is critical to monitor, but when you drill down into products/services and margin by customer, you will get an important insight into what is really happening in your business.

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💡 Need help scaling your business from 7 to 8 figures? Get in touch jenny@jennystilwell.com.au

Remember: Better strategy, better business, better life! See you next time!

Transcript

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Thank you.

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Hi there, this is Jenny Stilwell and welcome to the 7% Club podcast for the 7% of business owners who break through 2 million in sales and for those on track to join this club. If you want to upscale from 7 to 8 figures, you'll need to make some shifts in how you grow, structure and lead your company because you cannot get to 10 million in the same way that you reached your first 1 or 2 million in revenue. This podcast is to help you upscale. This episode is called Cash is King but Margin is Queen and the reason I'm covering this topic is because all too often I see small business owners, mostly those in foundation, focusing just on sales and all their activities are about getting the sale and being paid to receive the cash or the funds. Now whilst that's an extremely important part of your business to focus on, you need to look at your sales in conjunction with something else, your costs. And this is where margin comes in. It's the margin on your sales that pays for all the overheads in your business and will enable you to run at a profit or a loss. Now, I know this sounds absolutely glaringly obvious, but it's easy to lose sight of this, particularly in the chase to get the sale. To give you an example, I once had a client whose driving goal was to hit a million dollars in sales. And in her quest to do this, she lowered her fees more and more in order to acquire more business. She did make the million dollar mark in sales, but because of her fee cutting strategy, it had actually enabled her to bring on so many new clients. But it also resulted in her business being so cash strapped that she couldn't employ any more consultants to manage the increased workload. So I'm just going to run through a couple of examples now and I'll keep the numbers simple. A bit difficult on a podcast, easier with a whiteboard, but here we go. Let's say you turn over$100,000 a month in sales. Your overheads or your indirect costs are around$30,000 a month. Your direct costs are those costs directly associated with your sales, such as raw materials, the people who deliver services you sell, or wholesale product costs, for example. And they're also referred to as your cost of goods sold, often referred to as COGS. So in this example, you have$100,000 in sales. you also have$30,000 in overheads or indirect costs. So they're things like your salary, your rent, legal fees, accountants, internet, stationery, all those kinds of things for running your business. So after you've paid for your cost of the goods or the services that you sell, there needs to be a minimum of$30,000 left to cover your overheads in our example. So if you sell$100,000 worth of product or service, your margin must be$30,000 or more to cover the rest of the expenses in your business. So your margin must be no less than 30%. So what affects your margin? If you sell less, you won't be able to cover$30,000 of overheads because 30% of anything less than$100,000 in sales is not going to be enough. So in this example, the amount that you sell is going to increase or decrease your margin. If your cost of goods increases, your margin will reduce. If your overheads increase, you will need more than$30,000 in margin to cover them. But on the flip side, an increase in sales, a reduction in the cost of goods, and reducing your overheads will all increase your margin. So you really need to know these numbers in your business. What are your overheads that need to be paid every month? Do you know what your costs of goods are or what they need to be to cover your expenses? And then when you know those two things, what does that equate to in terms of how much you need to sell each month? Now in this podcast, I've used interchangeable terms like indirect costs and overheads and expenses to mean the costs in your business that aren't part of the cost of selling your product or service. Other terms I've interchanged are direct costs and cost of goods sold to mean actual cost to make and deliver your product or service. So whilst the amount you sell is important, the amount you keep is even more important. So for those of you who don't have a head for numbers, You still need to learn to get your head around margin if you haven't already because it underpins the results that you're going to have and it's one of the most important variables in your business and it really deserves as much attention as you can give it. Remember, better strategy, better business, better life. Until next time, this is Jenny Stilwell signing off. And that's all for today's episode of the 7% Club podcast. And thank you so much for listening. If you'd like advice and support on how to grow your business from seven to eight figures in a manageable and profitable way, get in touch via my website, jennystillwell.com.au and that's one L in the middle and two on the end or connect with me on LinkedIn. I'd love to chat to you. I'd love to hear from you and I'd love to be able to help you. And as always, wherever you are in the world, remember better strategy better business better life