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The Magic Hiding in the Margins

A Nerdy but Important Fact for Small Business Owners

I love how numbers interact with each other on a financial statement…how changing one thing here changes two things over here, and then watching how profit margins move higher and lower based on assumptions. Yep, you’re right…I am such a nerd about finance.

 

I was assisting a restaurant owner client of ours a few weeks ago with preparing revised projections for his first location so we could prepare new projections for a second location. His question to me was this (and I really liked this question):

 

“I can run this restaurant and gross $1m per year with nearly the same team and at the same food cost percentages as I can now at $700k. I think $1m is where we begin to see really strong profit margins. Can you please confirm that for me?”

 

Can I? Can John Mayer just grab a guitar and make you cry? YES, I can do that!

 

It was so much fun to run different gross revenue assumptions to find the tipping point where his net profit margins really started to shine. As you know from running your own business, you have fixed costs (those costs that increase very little or don’t increase at all, no matter how much your gross revenue is) and variable costs (costs that vary depending on the activity). When we analyzed his projections, we found that when his sales doubled, his profit would increase 14.5x. Yeah, you read that right. A 2x increase to the top line produced a 14.5x increase to the bottom line. By analyzing those fixed and variable costs, then making some revenue assumptions, the answers jumped off the spreadsheet for us.

 

It’s often that I see business owners underestimate the true impact of making changes in their businesses. For instance, you could have knocked over my client with a feather when I shared that metric with him. In most cases, clients think it will take SO MUCH WORK to find how to increase their current net profit to 2x or 3x that number, when in fact it may not. You have to know which levers to pull to make the changes you want to make, and in most cases the client is astonished to know that the levers are not that difficult to identify. Executing those changes may be hard, but it’s not hard to locate the path and start taking small steps towards big results.

 

Are you happy with your net profit? If you’re not, then it may be time to look at where you are, determine where you want to be, and then work on the path to get you there. You may be pleasantly surprised to find that while the work is hard (isn’t it always), the path to higher profits isn’t hard to find. You just need some expert guidance, and that’s where we come in.

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