The rise of the coronavirus and the restrictions that have followed have had a significant effect on businesses, both large and small. Social distancing and quarantine have transformed the way in which customers shop, with many companies falling casualty along the way. We are in uncertain times, but there are ways to improve your chances of weathering the storm. One such approach is to improve your operating margin, therefore increasing the overall health and resilience of the company.
The operating margin of a business is similar to its profit margin in that it showcases what proportion of sales are transformed in to profit. This can be a much more useful metric for gauging the health of a business when compared with revenue or gross profit. For example, a company could generate a large amount of revenue, but this number doesn’t illustrate how much of that money is accounted for and how much is pure profit. Therefore, a business could seem to be doing very well due to the money they’re bringing in, but in reality, they’re barely solvent due to their low operating margins.
When it comes to improving your operating margin and therefore, your overall profit, there are methods to consider.
Pricing
The pricing of products and services is incredibly important, and there are different approaches to how to tackle pricing. Obviously, the main difference in opinion tends to be whether to increase prices or decrease prices. Price cuts can incentivise customers, but you need to sell more products in order to benefit from the cut. Opposingly, price increases can bring in more money but have the potential to alienate customers.
A happy middle ground could be to implement a small price increase on products but also offer discounts to loyal customers. This way, you can increase profit but also reassure customers that they are still getting value for money.
Marketing
There are many ways in which marketing can help improve your operating margin and therefore, the overall health of the business. Good marketing in the form of customer data, sales figures and feedback can help you to ascertain who your customer is and what they want. In turn, this information will allow you to make changes to the business in real-time, encouraging repeat sales and possibly even bringing in new customers.
Another way that marketing can have a massive effect on sales is through branding. There are many companies who have become incredibly successful by working on the perceived value of their brand. For example, a product selling for much more than it costs to manufacture because customers value that particular brand. This effect is particularly noticeable in industries such as cosmetics, technology and jewellery, to name a few.
Marketing is flexible in that it can be as expensive or as cheap as you need it to be. Big campaigns can be fantastic, but you can also transform the image of your company with just one employee and a social media account.
Marketing also plays a significant role on the shop floor, with techniques such as link-selling and selling-up having the potential to boost profits significantly.
Savings
When it comes to improving your operating margin, increasing revenue is effective, but so is decreasing overall expenses. There are many ways in which you can cut costs and save money. Overheads such as rent, mortgages and utilities can really add up, so make sure that you aren’t paying more than you should be. Shop around for a better deal, or even better, invest in more energy-efficient solutions.
Changes to the product range itself can also offer savings. If you source your products from a supplier, ensure you are getting the best deal possible. If you think you can get better than try to work out a new agreement or find a cheaper supplier.
Many businesses lose money due to products which sit on the shelves for too long. Streamlining the business, and cutting the poorest selling products will allow you to focus on bestsellers, improving your overall profitability.
Finally, one of the easiest ways in which to make savings instantly is by reducing wastage. There are numerous types of wastage in business, all of which lead to a needless loss of money. Just some examples of aspects that you could improve include defective or easily damaged products, wasted talent, overproduction, over-transportation and unplanned downtime.
These are just some ways in which business owners can improve their operating margin. However, if you’d like to discuss this topic further or you have any other questions about the oncoming recession and how it will affect your business, we at Salhan Accountants are more than happy to help.
