Tales from the margins - marginal tale number 1

Once upon a time, there was a skilful person who set up a manufacturing business.  The business thrived and its reputation for quality products grew, so that it could charge good prices to its customers.

The company found that it was able to sell all it could produce, so it decided to extend its factory and buy more equipment so that it could make and sell even more.  The company’s accounts showed it was profitable, so its bank was keen to lend it more money to build the factory and buy the equipment.

Unfortunately, as the new factory was ready to produce, the recession was starting and the company had to make and sell cheaper products, just to keep the new factory busy.  At the same time, some of the longstanding customers decided to go for cheaper products as well, and the cost of raw materials was increasing.

Suddenly, the company was faced with lower sales prices, increased costs of raw materials and higher overheads from the new factory.  Although its turnover remained healthy, due to the additional production, the combination of lower margins and increased overheads was a dangerous cocktail.

Revell Ward tips:

• fight for your margins – an extra percent or two can make the difference between healthy profits and disaster.
• always pass on increases in your direct costs – your customers might complain, but you need to stick to your guns.  This might feel risky, but the alternative of accepting lower margins is even riskier and sets a dangerous precedent.
• be very careful when your sales mix changes.  Your turnover might look good, but if you are selling more goods at a low margin, this can be deceptive and much damage can be done before you realise.