It's all in the margin

According to the Oxford on line dictionary, a margin is the edge or border of something, for example, the eastern margin of the Indian Ocean or the blank border on each side of the print on a page. It is also an amount by which something is won, for example, they won by a convincing 17-point margin or in this context, a profit margin for example, launching these new products helped increase margins and market share. The character on the left is Dickens' Mr. Micawber, played here by the great W.C. Fields. If you have read David Copperfield, you will undoubtedly recall his mantra:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery

This is at the heart of any sustainable business plan! But what level of "margin" is desirable? An aggressive business will set high margins, which makes simple sense, and a not-for-profit social enterprise might set margins that cover all costs, build in a modest profit margin for growth and replacement of assets, but on the whole, their ethos may well drive down margins to the lowest, sustainable levels. However, the Micawber principle always applies! On face value, however, it assumes an initial investment (not from a loan) is followed by a revenue stream that operates in this way from day one. This is generally not the case for most business ventures. The so called "start-up" costs are typically borrowed, on the understanding that the profit margins will (in a year or two perhaps) be sufficient to maintain the business, and repay the investment loan. 

What kind of person or organisation would invest in a start up business? This is a key issue. You may recall I asked you to suggest a business idea that had an intrinsically  "low barrier" to entry. I suggested a hand car wash business. All that is needed is a bucket, soap and a sponge: the client provides the water and the car on its drive. For £5 I can buy a bucket, a bottle of detergent, a pair of rubber gloves and a set of four sponges on eBay. If I charge £3 per wash, I have made a profit after two cars! My initial investment (made by myself, my family or friends) can be repaid, and my revenue stream is "pure profit". Technically, this is an aggressive business plan. If I clean 10 cars a day, I am earning £600 a month for a five day working week. If I now hire an assistant and agree a salary of £400 a month, the business might expect an income of £1200 per month, with a margin of £795 (assuming a bottle of detergent lasts a month, and I don't have to replace my buckets, gloves and sponges). Not bad eh? Renting a disused petrol station, might be part of your planned expansion in year 2. And at this point, you made need to ask your Bank for a loan, to support your expansion. 

This is the simple, generic logic of enterprise economics. Of course, more sophisticated businesses need more start up investment, possibly to recruit expert staff, hire or purchase specialised equipment etc. The scale of investment is therefore something that needs planning. The more you need, the more demands your investors will make.They are usually one or combinations of the following classes

Banks: high street (or on line) institutions who will consider well defined loan applications and may (or may not) be incentivised to support new businesses by government initiatives. 

Angels are high wealth individuals who wish to grow their wealth by lending on the basis of a revenue return agreement, which may be negotiated in months or years, depending on the individual and the area of business.

Crowdfunding is a mechanism for throwing a share of your business open to anyone who is interested in what you are proposing and has some spare cash. Crowdfunding web sites abound!

Venture capitalists have become stereotyped by the Silicon Valley organisations that have successfully supported the commercialisation of the Internet, Biotech and more recently Social Media businesses. They have access to very large sums of money, tend to be comfortable with high risk proposals but don't like to lose their money!

Personal investors, by which I mean friends and family: in many small enterprises, the founder(s) mortgage their home to start up a new business, or bail it out when Micawber misery looms!

 

Finally, you should think about the level of margin that you think works for you and your business: this will impact on your own personal income and will be a key factor in persuading investors to invest! Before we begin the formal session on Wednesday next, one of last year's FCP201 students will tell you all about his business, which he has been running during his final year, while he completes his degree course!

As an addendum, someone asked me what are the top 6 businesses (I had to get at least one health related business in!) in respect of profit margins. From Forbes, they are:

1. Accounting, Tax Preparation, Bookkeeping and Payroll Services: 18.4%
2. Management of Companies and Enterprises: 15.5%  
3. Offices of Real Estate Agents and Brokers: 15.19%
4. Automotive Equipment Rental and Leasing: 14.55
5. Legal Services: 14.48%
6. Offices of Dentists: 14.41%