... continued from cover HOW TO FIND YOUR MARGINS
HOW MARGINS FACTOR INTO DECISION-MAKING Let’s take Castaway’s decision to add the three new beers as an example. New products generate excitement, especially when they are only available for a short amount of time. But for any one of those new beers to be as successful as their flagships, they would have to produce and sell nearly double the product. This increases production necessity, which increases man-hours and decreases net revenue. BALANCING MARGINS WITH PASSION Perhaps the most challenging part of any growing company is balancing what’s best for the company with what its leaders are passionate about. The vision and the long- term sustainability of every business is
retail, you can produce and mark up the product on your own, thus putting more revenue back in your business’s pocket. The only caveat for Castaway was that a new location meant a lease for a workspace, which was an added expense. Production: The new production elements could also affect Castaway’s operating profit margin. More product means more production, more storage, more employees, and ultimately, more red to add to the bottom line. MARGINS FOR NEW AND OLD COMPANIES Margins for new companies and margins for established companies are much different. When you see a rapidly growing company, odds are that they are growing in total revenue but their overall profit margins are actually decreasing. In the instance of Castaway, they had limited overhead in the beginning, but as they expanded, liabilities increased. More employees, benefit programs, storage needs, and production caused their operating margins to take a substantial hit. •
T o compete with other companies in the local market, it was clear that Castaway was going to need new beers, a new location, and a shift in production. This meant operating costs were going to change, and all of their margins right along with it. Beer: They needed to find projected margins for the new beers. They decided to keep the three flagship brews year- round and expand by adding two seasonal releases and one specialty release. After calculating the costs of the raw materials, employee time, and miscellaneous debts, they calculated 30 percent gross profit margin for their three new products. Location: By opening a retail site, there was considerable potential for the overall operating profit margin to shift drastically. It’s much more lucrative to sell your product at retail than wholesale. When you sell at wholesale, you don’t get the luxury of marking up the product — the customer you sell to does. At • •
dependent on both of these concepts. Often, passion leads to decisions that cause weak profit margins, but focusing too much on margins can dilute your brand. A healthy harmony and balance between the two is key to success. Retain Employees, Retain Customers One Relationship You Don’t Want to Take for Granted
On the customer side of things, a Bain & Company study found that it is 5–25 percent more expensive to get a new customer than it is to retain a current customer. Considering all of these costs, why wouldn’t you do everything you can to retain good employees? Employee retention is critical for morale. When you lose one employee, it’s not uncommon for others to follow. Of course, it’s also critical to understand why employees decide to leave. This is where in-depth exit interviews can provide valuable data. Know exactly why employees are leaving, and you can fix the problem. Additionally, consult with current employees on what the business can do better. The more you know, the more you can do. Right now, there are people on your team who are thinking about leaving your company. A 2017 Gallup survey found that 51 percent of workers are thinking about leaving their current company. The biggest reasons include a lack of advancement opportunity, poor work-life balance, and high stress. A 2017 Mercer Global Talent Trends study found that 34 percent of employees plan to leave their current position within the next 12 months. Realizing the value of your employees contributes to the success of your business. When you’re proactive and willingly cultivate a positive work environment, you retain employees. All you need to do is remember this simple equation: Happy employees = happy clients.
When you have high employee turnover, chances are that you have higher-than-average customer turnover. This is a detail that too many companies overlook. If your business is customer-facing, your employees must build relationships with customers, and these relationships are key to retaining your customers’ patronage. When a customer-facing employee leaves your company, customers have to start over and build a relationship with someone new. Not every customer will be willing to do that. Their sense of loyalty has been eroded, and it gives the customer the perfect opportunity to look elsewhere for similar products or services. While employee retention is not the sole factor in customer retention, it does influence it, so examining your staff turnover rate is always a good idea. The costs associated with replacing an employee are high. You have to find the right candidate and train them. Couple that cost with the cost of losing a client, and you lose a significant amount. According to a 2015 ERE Media study, to replace an entry-level employee, it costs about 30–50 percent of that employee’s annual salary. Need to replace a midlevel employee? It costs about 150 percent of their annual salary. Get to senior or highly specialized employees, and the cost reaches about 400 percent of their annual salary.
2 • www.hrresolutions.com
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