Margin Growth - Measuring Success or Failure

Just like Revenue Growth (See more on Revenue here), margin performance of a business, business unit or a product family must be judged by. If you are an executive or a business owner and cannot access your margin performance data quickly, accurately and easily then you have a serious priority to rectify.

Absolute Margin and Margin %

Measuring the total margin dollars you've achieved is vital to making sure the absolute profitability of the business in on target. Measure this regularly and separately.
In conjunction you must also track the margin % you are achieving to understand if your products are becoming more or less profitable over time. A sustained decrease in margin % will pose an existential threat to the business if you don't grow scale or tackle costs.

Margin Growth Vs. SPLY (Same Period Last Year)

The most typical use of margin as a metric is to compare current performance against a time in the past. For large firms this will typically be managed against the performance of the previous year. For example, on May 1st you will compare Jan-Apr 2016 sales against Jan-Apr 2015 sales - hopefully seeing an increase for 2016. If you are a small firm you may want to measure growth in small periods such as most recent three months against the previous three i.e. July - Sep versus Apr - Jun.

Of course you want to see positive revenue growth as a default. However, if your business needs to prioritise sales expansion you may find yourself sacrificing margin to achieve this. As long as you know the minimum amount of absolute margin that must be maintained, you will be confident to absorb the declines.

A high level summary with real data will help people trust other graphical work

Margin Trends

Absolute and Percentage Margin will typically be one number i.e. + 10%. The danger of this though is that it may hide vital information about what has happened in recent weeks or months. If you react to an overall profitability decline without appreciating recent improvements you may raise prices and lose customers unnecessarily, when prior actions had already set the path towards closing the gap.

See below an example of how an original margin gap has been closed and is trending in the right direction. Suggesting corrective action has been successful.

By July the original performance gap has been closed

Margin is a core metric and should form part of your regular leadership team discussions. However, ensure you use it as part of a bucket of metrics (See here) to gather the whole picture and rectify that against your stated business goals. If you do not feel like you currently have the capability to do this with your team you must quickly update your process.