Garage door industry magazine for garage door dealers, garage door manufacturers, garage door distributors, garage door installers, loading docks, garage door operators and openers, gates, and tools for the door industry.
Issue link: https://idoi.epubxp.com/i/216705
MANAGEMENT by John Zoller & David Bowen, Zoller Consulting, Inc. Margin is all You've Got ... and its Usually Miscalculated This is the frst of a multi-part series on understanding margins, and using the concept to make better business decisions. Ultimately, margin is all you've got (not grammatically pleasing, but accurate). Actually, "margin" is more accurately stated as Gross Margin (usually abbreviated as GM), which is the difference between your frm's revenue and the cost of the "product" you sell to generate that revenue. Gross Margin is typically expressed as a percentage of sales. For example, if a frm's sales amount to $1.0 million, and the "product" cost is $680.0 thousand, then the gross margin is $320.0 thousand, or 32.0% of sales. That fraction of the sales dollar that remains after paying for the "product" is what you have available for paying yourself, the rent, insurance, travel, all of the other operating costs, and what remains after taxes to invest in growth and expansion. While all of this seems very straightforward – you might even think it is almost too elementary – the fact is that margin is a misunderstood, misused and usually miscalculated number. What is "Product"? The word "product" is used to identify the basket of goods and services that you sell. It may be a physical item (a door unit); it may be service time (a repair), but is most typically a combination of the two (an installed door system). Different activities involve different product baskets, but essentially the product is what remains at the job site after you depart. For managerial and accounting purposes, we can determine gross margin dollars and percentages only after determining the cost of the product remaining at the site, and this requires a somewhat tedious look at what constitutes "Cost of Goods Sold," usually abbreviated as COGS. Accounting is very fexible, and there are numerous ways of determining what constitutes product cost, or COGS, but fnancial logic suggests that uniformity is valuable for managerial decision-making. Accordingly, the most uniform approach to COGS is to limit inclusion to materials and labor, the combination of which is often referred to as "direct costs." This seems simple enough, but as we progress in this consideration of margin we will fnd that determining the real cost of materials (doors, other products, fasteners, peripheral items, etc.), and the real cost of labor activity is more complex that it appears to be at frst glance. "Above and Below the Line" Finance and accounting people often use shorthand in discussing numbers, and "above the line" usually refers to sales and product related costs, while "below the line" refers to all of the operating and administrative costs. That suggests that "the line" is gross margin, and indeed that is correct, because as noted in the very frst line above, margin is what remains. Much of the problem in evaluating and comparing gross margins is the result of numerous other or "non-direct" costs that creep "above the line." Many owners, managers and bookkeepers insist that items such as fuel, job site travel, and equipment repair are product costs. Certainly it is not diffcult to construe an item such as rental equipment used during an installation as being a "direct" cost. However, not all installations require rental equipment, and if the margin contributions of various products are to be accurately compared, then COGS must be uniform, and thus limited to materials and labor. You can keep books and account for costs any way you choose – hey it's your business! You can add any number of cost items "above the line" that you feel are warranted. Unfortunately, a great many bookkeeping conventions are simply a matter of "… we have always done it that way," rather than based on informational logic or requirements. Regardless of convention or history or even software design, the cleaner and more comparable your margin calculations are, the better you can translate your operating activities into a strategic business model. Continued on page 46 44 International Door & Operator Industry™