Why Using Margins is a Great Way to Run Your Business

Margins Provide Insight into How Effective and Efficient Your Business is in Winning and Maintaining Customers

As an operator of a business, folks always seem to be seeking advice on what they can be doing to optimize or improve their position. That question is usually framed within the context of asking: “are my numbers good?” and then the follow up thereafter tends to be “what can I do to improve them?”

But before starting there, you have to take a few more steps back and just understand why something like margins can help you get to what is “good” and what you can do to improve them.

Every business and organization try to build successful, highly adopted, and highly maintained products and services to their customers. While doing so, they invest in various parts of their business to help acquire and retain customers.

Common areas of investment include product innovation / R&D, sales and marketing, customer support, executives and administrative professionals, and operations.

While each of these functional areas and departments have their unique importance and nuance for every organization, the simple fact is that they are there to help win new or support existing customers. Without customers and their revenue / purchases of your products and services, you do not really have a business (or one that can sustain itself long anyway…).

So having a good handle on the “ins and outs” of how effective and efficient your departments are at winning or supporting customers (and revenue) should be a baseline requirement your organization should have.

This is where margins come in - they are a lens into how effective and efficient your organization is in a certain area at a high-level when comparing it to your revenue base.

Margins are Your Best Friend, Learn their Power and Use Them

In business, people are always looking for shortcuts, want to get to an answer or hypothesis as quickly as possible, and be cognizant of their time and effort.

That’s why margins are such a great ratio and metric to employ across your operations and teams. Margins provide a high-level view into any part of your organization through a comparison to revenue.

When you get insight and knowledge from these margin calculations and by monitoring margins, you immediately can start the quest to find improvements or implement ways to maintain your margins.

This is a great start for any business operator or owner trying to better understand where in their organization may need more time and investment (or where there is a ton of inefficiency and too much costs being put into place).

A margin are just a metric - an expression that is not helpful by itself if it does not have action or implementation behind it.

But it is extremely important (and easy) in providing you insight into where you need to focus your organization’s time and effort.

How to Calculate Margins and Common Margins to Use

If you do not already know, margins are a ratio that is typically expressed as a quotient or percentage of total revenue (or specific segment / product revenue if applicable).

More simply, you divide whatever cost or profit metric you want to want to further evaluate by your total (or specific segment / product) revenue.

Margins are typically expressed as percentages and essentially show you how much of your revenue you consume with a certain cost or how much profitability is left over from that revenue after you account for certain costs.

Here is a list of some common margins that people utilize widely across the business landscape:

1. Gross profit margin: gross profit divided by total revenue

2. Operating costs as a % of revenue: operating costs divided by total revenue

3. EBITDA margin: EBITDA divided by total revenue

4. Operating income (EBIT) margin: operating income divided by total revenue

5. Net income margin: net income divided by total revenue

6. Free cash flow margin: free cash flow divided by total revenue

I do not want to be cavalier, but beyond these, you can practically create and add many permutations of margins as long as you have a specific cost or profit metric you want to monitor against your revenue.

So now that you have that baseline understanding on margins, have at it my friends 🙂.

Valuate is Here for Your Business Journey

At Valuate, our mission is to give business owners and operators the tools and insight they need on their data to understand what is “good” and what to do next.

We are creating a platform that provides benchmarks, content, and streamlined tasks and action plans to drive these decisions and improvements.

If you want more insight on margins, download our beta iOS app here, follow our newsletter and follow us across all major social media platforms (IG, X, and LinkedIn).

Looking forward to seeing you all join us on our journey 🚀