5 Symptoms of Margin Squeeze

5 Symptoms of Margin Squeeze

By John Bailey | May 2, 2020

Business owners that have been at it a while often fall into the daily grind of their business and don’t take a bird’s eye view on what is taking place in the business. The result of this often ends up being a situation where cash flow is very unstable, do not understand why the profit they think they are making does not translate into a healthy growing cash balance.

Margin squeeze is the primary cause of very tight cash flow which is up and down and is frustrating when you don’t really know where to start in finding out where the actual problems are in the business. We’ve put together 5 x key areas to investigate that can be a primary cause of margin squeeze.

5 Symptoms of Margin Squeeze – Things You Need to Watch Out For

  1. Not Knowing All the Costs in your Business

There are many costs in a business that are not easily seen and it’s incredibly important everything is known and understood. This includes all costs at the operational level and other costs such as tax payments, arrears, assets repayments and arrears.

  1. Costs in your Business that can Blow Out (Labour)

If you have a business that involves labour or other materials that can be quiet variable in the delivery of your products and services this can be a big area to review and investigate. Labour is a big one in this area, jobs taking longer than planned for can be a quick way to reducing your gross margins.

  1. In a Competitive Marketplace and Pricing to Get Volume

You find yourself in a market place where you use discounting as a primary tactic to keep volume up or increase volume. Discounting without understanding the impacts leads to instant erosion of margin and places financial pressure on the business.

Some businesses lower their pricing in trying to make profits based on volume which can be a strategy that works to move old stock etc. But using this strategy to increase volume if you’re not making the required gross margin on your products or services can place more pressure than intended.

  1. A Pricing Process Including Negotiation Before Work Confirmation

If you’re in an industry that negotiates before every sale before you begin work or receive the order to do work it can be a sign of margin troubles in the business. There are 2 x aspects to this, your price gets negotiated down impacting the margin, or you increase scope for the same price thinking it won’t matte that much.

  1. Cash Flow which is Up and Down Every Month

Inconsistent cash flow affects a business’s vital elements to operate such as the cost of labour and manufacturing. Fluctuating cash flow every month is one of the first signs you have margin squeeze, periods of high cash balances does not mean profits are healthy.

Leave a Reply 0 comments

Leave a Reply: