Gross Margin in Small Businesses
Gross margin is crucial, especially when it comes to small businesses. Through my many years in the industry I have learnt a lot about this subject, specifically from working with a number of clients. Here’s my experience.
What I Expected to Learn
I anticipated small businesses would understand the significance of KPI’s in their business.
In particular, financial measurement.
What I Did Learn
When I did my MBA with all those weekly case studies back in 1998, I learned to get into the numbers very quickly. What became very apparent, in pretty much every case study I undertook, was how important gross margin was in terms of determining strategy.
Since then I have worked alongside two cost and management accountants. Proper accountants in my view, producing proper management accounts. Not the ones that submit end of year accounts.
Certified or Chartered Accountants each year to HMRC for most small businesses.
Accurate management accounts that reflect the position of the business at any given time are fundamental to the running of any business.
In my day to day life I work with lots of SME’s, over the years, easily 1000’s. As a result, I would confidently say that less than 5% use management accounts and less than 1% accounts produced by cost and management accountants.
When you ask the question where is the margin in your business, you get left with blank stares.
It seems to me that really is the basis of all strategic advice, or it should be.
It is the gross margin that drives the profitability of the business, whether more acquisition or less cost. That view was reinforced through hours and hours of case studies over a 3 year period of study. As well as tens of years of advising small business on their digital marketing strategy.
You see in the modern era of marketing, in the context that marketing means business measurement is everything. Pure online businesses that evolve over time do this naturally. They get to an effective gross margin by the nature of what they do to be successful, analytics and conversion code become second nature. Cost of acquisition for lead and sale become third nature, or should be and are with the most successful ones. Marketing becomes naturally a variable cost linked to the cost of acquisition.
Almost by accident gross margin or contribution is measured. And indeed marketing costs that can be attributed to the sale in order to get to a cost of acquisition.
The tools to manage and grow a business are implicit in the raison d’etre of the online business.
For more traditional ‘offline’ businesses whether retail, consumer or B2B leads measurement – measurement of the cost sale is more complicated. Therefore it tends not to be done, certainly in terms of cost attribution and thus the establishment of gross margin. This is where the aforementioned cost and management accountant should come in, but in reality they don’t.
They identify the costs and marketing costs that can be attributed to the sale in order to get to a contribution.
We’ve found that those clients where we can get a description and understanding of their core product, service and market are the ones we can drive website visitors too. They grow profitably and profit strangely converts to cash. Therefore, increasing the size and newness of the directors cars in the car park.
It is the key to strategic advice in an increasingly online world.
What I’ll Do Differently
I will encourage clients to utilise cost and management accountants and work with with them closely to measure more effectively.
Set up meetings with clients to discuss measurement with their accountants.
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