Margins for error

Experience keeps a dear school, but fools will learn in no other.

The phrase: “turnover is vanity, profit is sanity” has been trotted out so much over the years I’ve been in this business that it’s become a cliché. But, like all clichés, it’s become one simply because it is true.

Profit, margin, bunce, call it what you will. When you are in the business of buying and selling (be it building materials, plumbing goods, groceries or pants and socks) the difference between what you pay for goods and what you sell them for is the key to the long term survival of a business.

But there’s a lot of competition out there (I’m talking about building and plumbing materials now, not pants and socks) and most companies are under pressure to increase business and find new areas, new customers, new avenues.

So it’s clearly very tempting to go all out to try and take as much business as you can in certain areas because volume sales are also good for business. However, when you’re not to only company doing that, then it can get sticky.

It’s one thing to sacrifice margins for volumes when business is moving along smoothly. It’s quite another thing to have to maintain those volumes when the market faces a downturn, especially one as prolonged as this one is going to be. If you have other sections of the business which are bringing in the profits then it’s probably OK to go hell-for-leather to maintain volumes in less-margin friendly areas. But what happens when those once profitable areas start to hit the rocks?

Once you start down a policy of low margin/high volume it’s hard to get out of it, especially when you are targeting areas of the business which are price-conscious at the best of times. And when those volume sales dry up, there aren’t many customers who will accept that their prices need to go up to make up for lack of volumes.

It’s the decisions that businesses make now that will determine how well they come out of this economic mess. The trouble is, some are still suffering from decisions that were made when things were much better. Your profit margins don’t just pay for the shareholders’ dividends and the directors’ boardroom lunches. Profit margins pay for investment in the business. Hell, they pay for the future and without them, there isn’t much of one.

About Fiona Russell-Horne

Group Managing Editor across the BMJ portfolio.

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