Why does Business care more about Margin Than Absolute Profit?

Why does Business care more about Margin Than Absolute Profit?

A one million dollar question that I used to ask myself "why are business cases worth?Millions?of dollars annually?(Net sales)?could be rejected"?!!!

Before we start, you can subscribe to my mailing list to receive great values from here:

No alt text provided for this image

I kept saying if it's my company, surely I will approve that business case because at the end of the day we are here to make money.

But recently I understood the reasons behind the rejection of such?X millions of dollars?as net sales, are bigger than this.

So let's go through a quick tour to elaborate on the reason.

Profit and loss statement (P&L)

Let me give you an overview of a simple P&L (Profit and losses statement) for most companies based on the below items:

1-Gross sales

2-Trade discount

3-Net sales = Gross sales- Trade discount

4-Supply chain cost = (Production cost+ Material cost+logistcs cost)

5-Profit= Net sales- supply chain cost

Margin % = Profit/Net sales

Difference between Profit and Margin:

Profit:?as we mentioned above is an absolute value based on the currency used.

Margin: is a?percentage?not an absolute value?from the profit over the net sales.

let's pick an example to ease the understanding, ie: Pepsi has the below givens:

No alt text provided for this image


1-Pepsi listing price/piece is?5 USD.

2-Monthly sales are?1,000,000 Pieces.

3-Trade discount is?20%?off from total sales.

4-Supply chain cost=?1.5 USD/piece.

let's calculate the profit and the margin for this case.

Firstly we will calculate the?Net sales= Gross sales-trade discount?= (5 USD X 1,000,000 pieces )- (5 USD X1,000,000 pieces) X 20%

Net sales= 5,000,000 - 1,000,000 =4,000,000 USD.

Supply chain cost?= (1.5 USD * 1,000,000 peices )=?1,500,000 USD

Profit= Net sales - Supply chain cost?= 4,000,000 - 1,500,000 = 2,500,000 USD

Margin %?=profit/net sales = 2,500,000/ 4,000,000 =?62.5%.

You can see that Pepsi is selling by?5 M USD?a month, with a monthly profit of?3 M USD?and a Margin of?62.5%

Till this point everything is clear, let's return back to the main subject:

Why does business care about Margin than Profit?!!!

Each company defines a specific window of Gross margin percentage % for any new product to be approved, and this percentage differs from country to country depending on many variables.

For instance, a company agreed that any business case for any new product should have a Gross margin % of not less than?50%.

There are two main reasons for that as per the below:

1-Downstream uncertainty:

Downstream here is everything related to the market uncertainty.

For simplicity let's use the same above example for Pepsi, but this time we will have a look from another perspective in terms of competition (Coca-cola):

Imagine that Pepsi and Coca-cola have the same listing price of 5 USD on the shelf, but Coca-cola decided to execute a promotion of?50% off?continuously to gain market share.

No alt text provided for this image


Pepsi realized that Coca-cola executed 50% off and they begin to lose market share, so Pepsi decided to perform the same promotion at 50% off.

Let's calculate the profit and margin again on that case based on the same givens before:

Net sales= Gross sales- Tarde discount = 5,000,000- (5,000,000X50%)=?2,5000,000 USD.

Profit= Net sales- supply chain cost= 2,500,000 - 1,500,000 =?1,000,000 USD.

Margin%= Profit/Net sales= 1/2.5=?40%.

Conclusion:

If you can see Pepsi still doing a?Profit?of 1 M USD?a month (the same concept that I used to think about initially), which is very good as the absolute value of money, but the?Margin % has dropped drastically by 22.5%?from 62.5% to 40%.

2-Upstream uncertainty:

The second reason is everything related to the supply chain cost as we mentioned before:

  • Material cost.
  • Production cost.
  • Logistics cost

let's have the same example before for the 50% off promotion of Pepsi.

Imagine that Pepsi received a message from the procurement team that raw material contributed massively to the BOM has been increased by 1 USD/piece so that Supply chain cost will be?2.5 USD/piece?instead of?1.5 USD/piece

let's calculate the profit and margin for that case:

Net sales= Gross sales- Tarde discount = 5,000,000- (5,000,000X50%)=?2,5000,000 USD.

Profit= Net sales- supply chain cost= 2,500,000 - 2,500,000 =?0 USD.

Margin%=?0%

Conclusion:

Due to an Adhoc happened in the Material cost, it ended up with zero profit and zero margin.

Imagine the company is selling with 5 M USD a month and has zero profit and zero margins.

That's why all business cases are been assessed based on margins with an agreed percentage and not an absolute profit.

Register in my free supply chain course from here:

Kunal Sengdane

3.5M+ Views on Motivational Content | Empowering 13K+ Followers | MBA in HR | Storyteller | Advocate for Personal Growth & Self-Improvement | Let's connect

2 年

Great Post

回复
Kampamba Mungulube

Co-Founder at Zyuka Food Suppliers

2 年

Insightful indeed.

回复

I want don't want money don't bisnees important for me silent not for me anymore spiking ????????????????

回复
Panda Sarika -- MBA,MPHIL HR Professor

34k plus followers ?? Voice for women community ?? Motivatioal Speaker ?? ??Listed among Top 100 rising influencers from Iinkdein ??????#motivational speaker #Product promotions#Women empowerment

2 年

Very inspiring post

回复
Ahmed Khaled

CEO @ Unleash ?? We Transform C-Suite Executives Into Thought Leaders By Crafting Immortal Personal Brands That Tell Stories To Inspire, Influence, And Impact ?? Top 100 Influential Entrepreneurs ?? Corporate Trainer

2 年

Give back

要查看或添加评论,请登录

Ahmed Khaled的更多文章

  • Momentum Mindset Program

    Momentum Mindset Program

    $1,000,000,000 companies are laying off their employees -Google (12,000 employees). -Unilever (7500 employees).

    5 条评论
  • Corporate Vs Thought Leaders on Linkedin

    Corporate Vs Thought Leaders on Linkedin

    Thought leadership will be always above Corporate leadership. It's not about the titles.

    21 条评论
  • Episode #1 (Branding Vs Bragging)

    Episode #1 (Branding Vs Bragging)

    In the bustling world of LinkedIn, where every post competes for attention, how do you ensure your voice stands out…

    14 条评论
  • Thought Leadership Branding Lounge Podcast

    Thought Leadership Branding Lounge Podcast

    Are you a leader and looking to lead with Impact in your industry? Are you a leader who's looking to be visible to the…

    11 条评论
  • Personal Branding vs. personal bragging, Which one do you select?

    Personal Branding vs. personal bragging, Which one do you select?

    Join me for an insightful audio event where we delve into the art of personal branding and its fine line with personal…

    32 条评论
  • 5 Reasons to Share Your Experience on linkedin

    5 Reasons to Share Your Experience on linkedin

    Catch me live tomorrow at 8:00 PM Dubai time where I will share with you the 5 reasons why do you need to share your…

    16 条评论
  • Elevate Your Corporate Persona

    Elevate Your Corporate Persona

    I will be going audio live every Tuesday on LinkedIn to help and guide Corporate leaders on building their personal…

    21 条评论
  • From Startup To Standout Episode

    From Startup To Standout Episode

    Listen to the first episode here: As the sun sets on another week, it's the perfect time for a moment of reflection and…

    16 条评论
  • Free Live Webinar (Build Your Personal Brand on LinkedIn)

    Free Live Webinar (Build Your Personal Brand on LinkedIn)

    Join my FREE Live Webinar (Build your personal brand on Linkedin). I am going to go live via Zoom webinar on 24th Jan…

    13 条评论
  • Authenticity Over Titles

    Authenticity Over Titles

    Many executives and corporate leaders find themselves caught in the web of identity transformation when they switch…

    19 条评论

社区洞察

其他会员也浏览了