I’m going to talk about margins – but before you switch off in mathematical horror, stop. Margins may seem boring, but if you’re not paying attention to yours, you could be paying a huge price.
Maths aside, margins matter to your business. So, give me a minute to explain, and you could really benefit.
The difference between revenue and profit
Let’s start with the difference between revenue and profit.
Your revenue is the total amount of money your business takes in. It’s the money you make.
If you're selling services, you'll likely find this quick assessment helpful ... especially if you're looking to build long-term financial security for you and your family.
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You don’t get to keep all that money. You have to pay the bills – wages, materials, couriers or heating, perhaps. Whatever costs your business incurs, take that away from your revenue.
The bit that is left over is your profit. It’s the money you keep – your bottom line.
I think we can all agree which one is the most important.
Is bigger really better when it comes to revenue?
There’s always a lot of focus on revenue. You might have heard business owners talking about building their six-figure income – or even better, their seven-figure income. It sounds impressive, doesn’t it?
But how much of that income is profit? It is surprisingly common for a business with a £500k revenue to make more profit than a business with a £1m in revenue. That suggests that the bigger business is doing more work for less profit.
Remember that the purpose of your business is not to keep you busy. We want our business to give us financial security, freedom and fulfilment – so our profit matters.
What’s your biggest cost?
Let’s take a moment to calculate your margin.
If your business is in a service industry, your margin is your income minus the costs of delivering that service – the rent and bills for running your office, stationery perhaps, salaries if you have any team members.
There is one cost that we often overlook, and it might be your biggest. Your time.
So, instead of all those dry old accountancy books talking about your margin as a percentage, let’s put it another way.
What if I told you that your margin is your ‘income per hour’?
Instead of increasing your margin by, say, 2%, let’s talk about increasing it by ‘£ income per hour’ of your time. Doesn’t that sound more interesting!
Can I increase my margin?
Consider how you charge for your services. If you charge £80 per hour, or £700 per day, or whatever it may be, you have clearly defined your margin. It’s now stuck there. The only way to earn more is to work more hours – incurring the cost of more time – which is taking you further away from the 2nd F – freedom.
So, margins define how much it costs you to earn your income.
The aim of your business is to keep the money you want in as little time as you can, or, to put it another way, to make more profit in less time.
Growing your margins is one of the most lucrative actions you can take. And how do you do that? By designing a better offer that increases your income per hour.
Is putting your prices up a better offer? It’s an obvious option, but it has a limit. There are better ways; in truth you can multiply your margins many times.
If you think margins sound more interesting already, get in touch. We can help you identify how to start increasing yours.