Margin conundrum

A calculation without sagacity

How do companies with no professional management in place fail to make a profit? Most SMEs make margin miscalculations, and incur heavy unplanned expenditure owing to their failure in factoring overall expenses, writes Gignesh Govindan.

Often we speak about SMART (specific, measurable, attainable, realistic, time-bound ) Goals. But do you know how choosing the correct goal statement and calculations determine the success and failure of an organization?

A smart organisation engaged in retail business realises that its private-label (in house) brands fetch a margin of more than 50 per cent. Naturally, with 50 per cent of the revenue coming from the private label business the company’s bottom line is supposed to improve. After SWOT analysis, it is concluded that the company can do it if it stretches all its resources to optimise the production. Thus the goal was set for meeting 50 per cent of the sales from the private label.

The top management has done weekly, forthrightly and monthly reviews to ensure that the goal is achievable. Accordingly, the private label team has been put under pressure to execute the task. The team size has been increased; new vendors have been appointed; new products have been rolled out without adequate study about the market.

Team members have travelled up and down round the clock to ensure that products are available in targeted stores. Naturally, the travel costs go up; trial and error methods render some losses. The aggressive marketing strategy has bumped up the expenses further. Finally, the strategic goal of cloaking business with 50 per cent of private labels has been achieved! Realistically, the private label business has trimmed the margin correspondingly for the expenses incurred for selling it.

Ultimately, has the organisation achieved its goal? Connotations of the goal were as wrong as the calculation of the margin. While looking straight up to the top line goal, an ill-defined equation for assessing the net margin messed up the bottom line.

It is important to have a well-defined strategy in place in the context of one’s business requirements. Most companies with an unplanned market approach end up committing this mistake, but rarely by professionally-run enterprises.