The Magic of Margin with #Greggers

Today we’ll briefly (kinda) examine a hot topic of conversation floating around the Bike industry.  It’s a word uttered in disgust by some shop owners.  A word touted by sales reps and industry insiders.  A word that can be expressed as a percentage or as a dollar figure.  Two star-crossed syllables, coveted eternally by Vendors and Dealers alike.

We use this word to make decisions, to evaluate our strategy, and also to pivot when necessary.  It’s both revered and at the same time, unfortunately, shrouded in mystery.
Yes, it’s on the tip of your Tongue:
“Maybe, we should only stock keystone accessories.”
     “Anybody know how many points we get on this?”
          “Rent’s going up.  How we gonna pay for it?”
               “Greggers, whatta’ you think?”    
                    “I’d don’t know. Ask Watts.
                            ” Never order these again.”
 You any good at crossword puzzles?  Its Margin.  MARGIN.  *Ding*
Margin can be calculated and analyzed many ways. Its complex and often misunderstood…In other words.  Read this shit and let’s try to get a bit clearer on what Margin is. I guess, maybe.

I know, right.  Who thought it would be this hard?
Understanding Margin starts with knowing that it is one tool in your tool chest for understanding your business and making decisions.  
It is not the Holy Grail, Dr. Jones.  
 Let me repeat that.  Margin is one tool.   Albeit, a pretty good one.

I have 3 favorite types of Margin.
 IMG_0005
Gross Margin % : The Selling Price (REVENUE) of an item minus Your Cost (COST OF GOODS SOLD) divided by the Selling Price (REVENUE). SIMPLE!
  1. Take time to be checked in with your GROSS MARGIN % on a total average basis as well as a category basis.
  2. Don’t make the mistake of being obsessed with increasing the GM of every product you buy or sell. Rember margin is only one tool in your toolbox.
  3. Understand that a high gross margin doesn’t always mean high consumer value.  Also read, if you are unable to sell a product, or your employees and customers do not recognize the value of a product then it’s gross margin is effectively ZERO.

Operating Margin %: REVENUE minus COST OF GOODS SOLD and the OPERATING COSTS associated with operating your bike shop, divided by total  REVENUE. (IE: Rent, Payroll, utilities, etc.)
  1. Operating Profit Margin (OPM) is all relative. There is NO right or wrong number. Frankly, this is a measure of efficiency. How good are we at turning our resources into dollars?
  2. OPM is not an answer to a question. But rather, a way for us to ask meaningful questions about our strategy and execution.
  3. Once you have found your approximate OPM, use it as a benchmark and refer to it Quarterly with your accountant and your team. Naturally, as a business owner, you probably already know where you’d like to see improvement in your shop’s efficiency. Get motivated and implement a strategy that you believe will improve your OPM then check your result against your benchmark.

Net Profit Margin % : If your shop is profitable this number will be greater than Zero and will represent REVENUE minus COST OF GOODS SOLD, OPERATING COSTS, TAXES, and INTEREST ON OUTSTANDING DEBTS, divided by REVENUE.

  1. Net Profit Margin is how we place a value on a business in a Capitalistic society. If you want to see this type of valuation happen in “Real-Time,” watch shark Tank.
  2. If you’re a shop owner or manager, Net Profit Margin is how we prove that our business has an intrinsic value that can be shown in dollars.  It also lets us know the investment value of the dollars we have spent.
  3. As an owner, should you ever decide to Sell your shop, Borrow money for another venture, or Retire; knowing your Net Profit Margin will gve you a head start in planning for your future.

Okay friends, so thats MARGIN as I understand it. If you have questions or want to explore these topics further hit me up on Facebook, Insta-whatevers, or in the comment section below! Here’s to the IBD.

Hugs,

Greggers

 

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