Margin vs. Markup

Often I hear small business people talk about margin when what they mean is mark up. Because they misunderstand the difference they often do not understand why they have less money coming to the bottom line than they planned.

Markup if the percentage added to the cost of the product for overhead, sales and profit. For example, if you buy a widget for $100 and add twenty-five percent for overhead and profit the cost of the item will be $125. The markup is 25%.

The Margin is the overhead and profit divided by the total sale price, in the example above the gross margin is $125/25 or 20%. I you prepared you budget for sales at $1,250,000 and marked up your cost by 20% you would wind with one-fifth less to spend on overhead and profit.   

Margin is often used interchangeably with Gross Margin. Gross margin is the difference between income and the direct cost of goods sold before deducting overhead and cost of sales.

This table illustrates the shortfall you can experience it you only consider Markup.

Cost of Goods sold	Markup %	Markup $	sell price	Margin %	variance
$ 300,000.00	10%	30000	330000	9%	1%
$ 500,000.00	20%	100000	600000	17%	3%
$ 750,000.00	25%	187500	937500	20%	5%
$1,000,000.00	33%	330000	1330000	25%	8%

Original content copyright 2010 Thomas Robinson

Strategic Plan Step One, What Do You Want?

A strategy is a detailed and highly organized plan of action. A Strategic Plan is a written plan for your company's future including what processes and systems will be need to achieve the goals.

Your first step in preparing your strategic plan is to decide what you want not only professionally but personally. Ask yourself what you want out of your business. Do you want to travel more, go fishing or pursue other hobby, or spend more time with your family? Envision what you would do if you were not at work. Envision five years from now and when you are ready to retire.  Make a written list. For example;

·         Play golf three times a week

·         Take my kids to school every morning

·         Never work on weekends or take work home

·         Go on two skiing trips a year

·         Live in a small town

·         Take a cruise every winter

·         Spent a year sailing the Bahamas

·         Own the biggest house in town

·         Own a speed boat

·         Drive race cars

·         Send the kids to college

·         Buy a new car every year

·         Retire at 50

Make the lists as detailed and as long as you like. Prioritize your goals from most important to least.  

Is managing your company the thing that you want to do? If you worked all you life and saved so you could turn your hobby into a business such as owning a SCUBA shop you still need a plan to treat the shop as a business not a hobby so the dream does not destroy you financially.

How much money does your business need to make to allow you to afford your wish list? Is that financial goal possible in your industry, your location or within the scope of your abilities? If one of your primary goals is to live in a town with a population fewer than 1,000 people and you need to sell a million dollars worth of cell phones in that small town then one of your goals needs to change.

Once you have established your personal and financial goals you can begin to establish a plan to accomplish those goals.  Establishing a strategic plan without setting your goals would be like using a map when you do not where you are going.   

Original Content Copyright 2010 Thomas Robinson

Create a Repeatable Procedure

Call it a system, a process, a procedure or even a checklist if you commit the process that you use to run your company to paper instead in the head of one of your employees you accomplish two things; You create a recipe to complete the task the same way with the same results every time and you own the process and should your employee leave you do not have to recreate it. If you have all the employees tasks committed to writing you can hire a less skilled and less expensive employee to do the job.

As an example, think of the national fast food burger restaurant.  Whether you like the hamburgers or not they are the same in every franchise from New York to California. It is not because they hire great chefs to cook the burgers it is because they have a repeatable procedure; fry 30 seconds on one side flip and fry 30 seconds on the second side, put it on a bun and apply a pickle, add a squirt of sauce, a piece of lettuce and the burger is done.  Even the French fry fryer has a timer and there is a clock that tells them when the fries need to be discarded because they have been in the bin too long.

Each item on the menu has a procedure as do such tasks as cleaning tables, emptying trash and restocking the napkins. Because of these processes they can run the restaurant with minimum wage individuals who are still in high school or do not even speak the native language.

So where do you start? The truth is it doesn't matter just start. In the home building business we started with the procedure for doing the biweekly payroll. I had the bookkeeper write the procedure as she did the regular payroll including every key stroke in our accounting program. Two weeks later I took the procedure and tried to do the payroll.  It took a couple of modifications but we developed the procedure. We then formalized the procedure by assigning responsibility by position (bookkeeper not Judy,) and when the procedure would be performed (every second Thursday.)

Another way good way to decide which procedure to formalize is in reaction to a frustration.  A business that did sales and distribution as a manufacturer's rep has weekly and monthly reports for the salespeople. The salespeople were frustrated because the reports were often late, for wrong dates or in a variety of wrong formats. The company created a written procedure including all the keystrokes in the accounting program to create the report clearly defining the time frames the report were to cover.  They then assigned responsibility in this case the shipping clerk, the frequency (weekly every Monday and monthly first business day of every month.)  A reminder was added to the calendar to remind the shipping clerk. For this procedure a feedback loop was added (email President when reports are sent to salespeople.)

The more procedures you have in writing the less you depend on individuals who can leave at any time and if an employee does leave you will have an instruction manual of their job for the next employee.

Original content copyright 2010 Thomas Robinson

What if you get sick?

What if you have a family or health emergency and need to be away for extended period of time?  Could the company operate without you? Can you take the time to deal with the issue?

Preparing a company for a long tern illness in some ways is more difficult than if you die for two reasons; there is no life insurance to compensate the company for your lost services and you want the company to survive until you can return.

I once had a health emergency. As it turned out it was over in a matter of days but it could have been much worse. As I lay in the hospital bed instead of worrying about the issue at hand I was trying to figure out what was going to happen on Monday when I was not at the office.

Your company will likely perform best under stress if the employees are already accustomed to making day to day decisions. If they need to bring every problem and decision to you then they are not likely to easily slip into the decision mode.  Unfortunately it is more common for small business owners to make all the decisions and deal with all crises personally.

 You need a plan and you need to empower the employees that will need to carry on with the authority to do what needs to be done.

The trusted employee that you count on to take over for you might not be capable or willing if you have not trained this employee in decision making and the general operation of you business.

Begin to set up the company so it runs without you.

·         Clearly define lines of authority. Everyone reports to you will not work if you are not there.

·         Set op processes and systems to perform all functions in the company so everyone knows what to do and how to do it.

·         Bring key employees into the decision process so they are accustomed to making decisions and know how to do it. Empower these employees to make routine and even none routine decisions.

·         Make sure you key customers and suppliers know your key employees so that if they get a call from someone other than you it is not a warning sign.

·          Make sure that key employees have access to all the tools and resources to run the company while you are ill.

If your key employees are accustomed to the company running well on a day to day basis with minimum input from you when you are available then they can rise to the occasion when you are not available.  You will still worry but you will have the “luxury” of being sick and the time to get well.

Original Material (c) Thomas Robinson