Not All Business is Good Business

Photo by Bethany Legg on Unsplash

Many businesses operate by the “marginal” principle – If margin is positive, then it is good business – Not necessarily. It depends.
(Gross Margin is calculated – Revenue less Cost of Goods Sold.  Net Contribution is Gross Margin less other costs related to the sale)

Opportunity cost –  If you have limited resources, then there is an opportunity cost associated with selling to a customer that produces less margin. In those cases, most likely better to sell to the customer that produces the most margin.
For example, if you have ONE widget, and 2 cash buyers, would you sell for $1 or $1million. Both are going to have a positive impact, but clearly the $1million is going to have the bigger impact. If you sold for $1, the opportunity cost of that decision would be $999,999 – a million less the $1 you received.

Going Concern – filling the order requires more cash than you have available, causing bankruptcy. If you can borrow money to finance the orders, then you would need to compare the cost of the financing and the risk of a bad debt against the net contribution from that sale.

Other costs – There are often other costs incurred that are not part of cost of goods.

  • These could be other direct or indirect costs such as a sales person having to provide hockey tickets to secure the sale. Those costs need to be accounted for as well to determine the real or net contribution from that customer.
  • Another e.g. would be a customer who requires you look at each item and only select the truly best pieces from your inventory. This extra time costs money and needs to be taken into consideration when determining if good business

If you would like to improve your business or know anyone who would like to improve theirs, call me.

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