19 Aug 2022
Business Business School Business Support Startup
But they grow… they gather momentum.
By the time you realise what’s happening, you’re already in trouble.
Those pesky rising costs have been chipping away at your profit margins right under your nose, whilst you basked in the glory of your rising sales figures
It’s what can happen if you don’t keep an eye your cost margins.
So what, in the name of all that’s holy, is a cost margin?
Well, it’s the same as a profit margin, except that instead of measuring your profit as a percentage of your sales, it measures a particular cost as a percentage of your sales.
So, get that calculator out and let’s look at how we calculate cost margins, using a practical example.
Sales for July totals £100,000. Wages in the same month cost £30,000.
Formula is: Cost x 100 / Sales = Cost Margin. So in this case, 30,000 x 100 / 100,000 = 30%
The following month sales reach £150,000. However, we spend £60,00 on wages.
Try the formula with these figures and you should see the cost margin at 40%
An increase of 10% in wage costs, and consequently a 10% drop in profits.
Now there may be a perfectly good reason for this. On the other hand, your wage bill may have increased due to a fall in efficiency or unnecessary overtime etc.
Either way, the important thing is that you are aware it’s happening and can take appropriate action before it’s too late.
By measuring costs as a percentage of sales, you can track them in real terms in relation to sales. By doing this you will spot trends and can react accordingly.
Wage cost margins are probably the most common ‘creeper uppers’, but it’s worth checking any significant costs to the business on a regular basis.
If you do it monthly, you’ll recognise the trends sooner, and it will be easier and much less painful to fix the problem.
Give it a go. Look after your margins people!