CEO Wavelength

Margins Matter.

When you’re looking at the health of your business, profit margins matter.

The question is, what amount of margin should a healthy business have? The real answer – it depends. Margins are tied to what kind of business you have, where your business is at in its lifecycle, the industry or sector your business plays in and, market trends, as well as your leadership style - based on how you choose to build and operate your business.

Understanding the kind of business you have.

What is your business product or service and, what costs do you have? Do you have light or heavy capital costs? Capital costs will impact your margins, without a doubt. Are you innovating with your product or service? That too, can impact your margins (but there are tax credits and grants that may help offset these costs so, leverage the tax credits and grants brought to you by taxpayers).

Then of course, there’s this consideration – the course of time and what your business becomes over time. Today, maybe your business is a Hardware as a Service (HaaS) but, sometime later, in a few years, your business becomes a Data as a Service (DaaS), with the things du jour like, a data lake, digital twins, etc. All of these things impact margins and with some good planning with a finance expert, you can get the margins that align with your business model, with a few more things to consider (nudge to keep reading).

Recognizing where your business is at in the lifecycle.

If you’re growing your business, your margins will be impacted - they’ll be slimmer because you are investing in your business. Same goes for if you’re changing your business or, “retooling” so that your business can grow later; margins will most likely be impacted because finding ways to cut down on expenses will not always free up the cash to invest in the changes needed for your business to change. Tech costs, people costs, revamping a product roadmap (and possibly an IP roadmap), etc. - these things are investments to bring your business into tip top shape for the future. Having smaller margins when you grow or, change your business to grow is not a bad thing. When you arrange financing to support your growth, financing partners will want to negotiate the kind of margins they expect with the financing being considered. Planning throughout the stages of your business lifecycle with the right expertise will help you determine what margins you should strive to achieve to realize your business goals.

When planning the exit of your business, margins will also be a factor. If your business is innovative, with some hefty tangible and intangible IP assets, the right buyer will look beyond your margins and overall EBITDA in the purchase price of your business. Planning your exit with some lead time always helps along with involving the right finance experts to drive the exit plan.

Getting clear about where the market is going and the impact on your industry or sector.

No business is onto an island of itself. Market trends shape sectors and industries. So, this means you need to keep sight of the long-term picture of where the market is going and the opportunities and challenges that can impact your business. Knowing where your business is situated in your industry or sector is really important, too. If you’re an industry leader, you want to keep being that leader, invest in the things that allow that to happen and, that can impact your margins. Being an industry leader can also mean the possibility of having better margins because you’re shaping the market and you have more control over the cost of your product or service. Your profit margins are tied to not only what kind of business you have and, the industry you’re in, but also whether you are a driving force of your industry’s future and how you go about being that driving force.

Margins are also about what you want as a leader for your business and how you plan for it.

With good planning, there is choice in what your profit margins can and should be.

There are trade-offs based on the choices you make. For example, bigger margins might mean fewer customers but, the right customers that will pay the pricing that supports your bigger margins and, this might mean you can make bigger investments in people, product, etc. So, get clear on what success looks like for your business, the best path forward, set up the guardrails for that path, align the right talent including financial expertise to power your path to success - and incorporate the right kind of margins, at each step of the way.