How to Improve Your Margins

Posted by | September 21, 2020 | Accounting | No Comments

The type of practice that you operate will determine what metrics you should look at to increase your margins. However, there are some commonalities that most practices share.

First, let’s look at the definition of the word margin. Margin is the difference between income and the costs associated with delivering your product or service to your customer. But what are the metrics that can improve your margins?

A starting metric to review is the cost and time it takes to produce each product or service you offer. Without knowing how much it takes to produce a product, it is impossible to price your offering correctly. You should track production time and production costs per product that you are producing to begin improving your margins.

Secondly, the price of your product should always be of concern when looking at your margins. What should your price point be? Does this price point allow you the opportunity to capitalize on economies of scale and delivery? If you simply raise the price of your product/service, will your customers purchase it? If your price is $1,000 and your profit is $500, but you are not selling as many products as when your price was $750 then it may not be a great idea to raise your price.

Now that the two most important aspects are out of the way what can you look at next?

Cost of Customer Acquisition- If you can decrease the cost of customer acquisition, you can increase your margins.

Overhead Cost- What overhead can you reduce or shift to increase your profitability? Will one of your vendors share or take over an overhead expense for you?

Inventory- What inventory level reduces production costs and maximizes sales? Are there any cost reductions in buying in bulk? Are there any carrying costs for inventory that is sitting unsold?

Input Costs- Do you have any costs you can cut? If not, can you reduce the costs associated with producing your product?

Labor Costs- How many hours does it take to produce your product? Are there inadequacies in your production that could be improved?  Could management be improved?  What systems should be looked at to decrease the hours per product?

Recurring Expenses- One of the quickest ways to increase your net profitability, is by looking at recurring expenses you don’t use anymore. There are usually subscriptions that you don’t need, that you are paying for currently. Carefully look through those and unsubscribe to any that you do not need.

These metrics may help you improve your margins, but most importantly, they help you gain the financial clarity you need to make informed and intentional decisions for the current state and future success of your practice. Financial clarity is a metric in and of itself and arguably one of the most important metrics.

Click here to learn more on how Kahuna can help you gain financial clarity in your practice, so you can improve your margins, increase your profitability, with cash in the bank.

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