FINANCIAL AFFAIRS
Know your Margin! If you’re like many business owners, you don’t find monitoring the numbers on your books very exciting. You would rather be digging in the dirt and planting something. It’s more satisfying to walk a field of plants or trees than to sit in the office and work on knowing which critical numbers affect business performance.
By Merle T. Northrop, CBI Flatirons Ventures Inc.
Welcome to Financial Affairs, a new column appearing in the LooseLeaf, where a panel of financial consultants provides tips and ideas with specific applications to the
bare-root plant stock to be grown to a marketable size in the spring. If the product doesn’t sell in the spring, two things likely happen, the holding costs increase and the obtainable sales price decreases. This table illustrates the escalating costs accruing during a season. This table suggests the longer a growing product is kept, the lower the margin, due to continuing maintenance costs to hold the product. And at the end of the day, the product may well be worth nothing! The question for the business owner is: Would it have been better to lower the price early in the season, planning to sell more products at a lower margin, or keep holding to the high price and maybe ending up throwing product in the compost pile?
However, being aware of how your business operation is measuring up by the numbers is essential. Among all the financial figures that you should be tracking regularly, the one number you must know, in my opinion, is your margin. Because your margin is where your business makes a profit, you need to pay attention to it so you can pay the rent and pay yourself a salary. Knowing your margins and keeping them within acceptable ranges are critical to your company’s success. The difference between the price at which you sell your product or service is what you should be focusing on. Your margin should include the incremental costs to obtain, produce and offer the product or service and can include labor, shipping, supplies and materials. To calculate your margin, take the true selling price of the item and subtract all the costs of getting it into a salable condition to determine the difference. Take that difference and divide it by the actual sales price to get your margin percentage.
In the retail environment, computing your margin is pretty simple. Calculate a few variables and you can determine the margin. There is a simplified method for retail to get a sales price called “Keystone Pricing” which means to simply double the cost of the product. This does not apply appropriately in growing or manufacturing situations! However, the concept is still the same whether applied to retail, manufacturing or growing. All industries have standard references for good margins, find out your industry margin ranges and then develop your own margins by setting your prices with a profitable difference from your costs. Remember: without a margin, you might not get paid!
Determining margin as a grower or manufacturer is more difficult than for a retailer. As a grower, it is preferable to build up to the sales price. Start with the product’s cost and maintenance costs to determine cost of goods, then apply a desired “margin devisor” to determine suggested sales price. As an example, a greenhouse buys
Based in Boulder, Colo., Merle T. Northrop, CBI, is a CNGA member specializing in business advisory for companies in the green industry. He can be reached at 303.440.6141 or Merle@BusinessSolutionsAdvisory.com.
businesses of CNGA members. Check
SPRING:
FALL:
COMPOST:
$1.00
$1.00
$1.00
$1.00
Pot
0.50
0.50
0.50
0.50
Soil
0.20
0.20
0.20
0.20
Water
0.10
0.20
0.30
0.40
expert advice on
Fertilizer
0.20
0.40
0.60
0.80
improving your
Labor to maintain
1.00
2.00
3.00
4.00
Product Cost
$3.00
$4.30
$5.60
$6.90
Desired Gross Profit
$4.50
$2.95
$1.35
Zilch!
60%
41%
19%
LOSS
$7.50
$7.25
$6.95
$0.00
out this column in each issue to find
bottom line.
Bare-Root
SUMMER:
MARGIN Asking Price
20
LooseLeaf January/February 2013