Finance Myth: Margins Are Unpredictable in Volatile Times
Tom Stimson
May 6, 2022
A blue 3D bar graph image emerges out of a white phone on its back, and an arrow indicates the graph's gradual increase.

The Myth: Margins are more unpredictable in volatile times.

The Problem: With post-pandemic business picking up, people are thinking, “We’re getting so busy, and our margins are going to be all over the place just like they were when we were busy before.”

In other words, businesses are panicking about costs.

What they don’t realize is that costs were unpredictable back in pre-pandemic times because businesses weren’t paying enough attention. They weren’t budgeting for necessary outside resources, they were seeking suppliers at the last minute, and every new job had a different profit margin.

People believe the Margin Myth because before the pandemic, margins appeared predictable when business was good.

The Reality: You learned a lot during the pandemic. If you’re running a lean business, your margins don’t actually change that much when you get busy.

So don’t panic.

Since your business is now more scalable, you can maintain the same margins when you choose to take on business and complete the fulfillment. You just get busier at procurement.

Margins Are More Predictable Today, Not Less

The reason margins appeared to be predictable in pre-pandemic times was that companies were overstaffed and oversupplied.

They contacted suppliers at the last minute, and every new job had a different profit margin curve because the available resources were always different. This is a byproduct of having too much supply on the shelf.

This was all caused by a lack of awareness, and that’s pretty much what the Margin Myth is about. When businesspeople aren’t aware of what they’re going to need before they budget a job, they fail to account for the eventuality of needing resources from somewhere other than their own shelf.

In other words, before the pandemic we fell into some pretty lazy habits. We only knew we were busy because the margins on a job were low.

In fact, the pandemic taught us that if we keep overhead low and direct resource expenses at a minimum, we can focus on procuring on demand. Then the cost of doing business spreads across all jobs fairly evenly. This way, most jobs can be budgeted based on an equal footing of costs.

What we’re talking about here are replacement costs. This is when the cost of goods sold is not what you could buy them for on the day you were putting the budget together.

Forecast costs are the replacement costs that you can reliably procure a resource for. With low overhead, limited resources, and a constrained supply chain, replacement costs have become much better understood today.

Awareness of Constraints Leads to Predictability

One of the reasons the Margin Myth got started is because we previously had so many internal resources that our perception of the cost of those resources was low. Internal costs seem inherently lower than external costs.

When you have too many internal costs, you tend to program yourself to think that the internal cost is the norm.

Today, though, if you’re running a lean business, you don’t have all of these internal resources, and you’re hyper-aware of your constraints. And that’s a good thing.

You have a much more realistic expectation about what a given job is going to cost. And you can be more careful about how you sell.

Your capacity is better defined. Because of this, your margins are going to be more predictable, not less.

Pricing Volatility in the Supply Chain

Pricing volatility in the supply chain is a problem, especially when you don’t procure early enough.

Buying late in the process begets unpredictable costs. But if you’re acutely aware of your capacity constraints, you’re less likely to wander off into the unpredictable pricing of buying in an extremely constrained last-minute market.

Your job isn’t to absorb the volatility in the supply chain. Your role is to reflect that volatility and help your client make value choices about how they spend their money.

In short, volatility shouldn’t affect your margins. It should affect your sale.

About Tom Stimson
Tom Stimson MBA, CTS is an authority on business and strategy for small- to medium-sized companies. He is an expert on project-based selling and a thought leader for innovative business processes.
Read more

Leave a Reply

Your email address will not be published.