Friday, February 22, 2008

The Margin. Part III.

Our margin is 35.71%.

So what? How does that help us decide whether to take one more order? Well, it doesn't. We can't make decisions about percents very easily. We need to turn it from a percent into cold hard cash.

Margin is the amount we make per order. If we multiply margin (percent) times the average value of an order (dollars) we'll get a margin in dollars. For the past couple months our average booked order has been worth over $80. 35.71% x $80 is about $30. That means our margin per order is about $30.

Now we have something to sink our teeth into. When we're faced with a choice of whether or not to take one more order, how do we value the decision? How much does it cost to say "No"?

The answer is it costs $30.

That number has some big implications. A couple examples can help us put it in perspective.

Let's say a customer rings us at 8:45 pm. The phones are closed, we don't answer. They decide to shop elsewhere. We lose the order. How much did we lose? $30.

A customer rings us at 3:30 pm on Wednesday. We can't take the add-on. They go shop elsewhere. How much did we lose? $30.


This has been a long trip to get to this number, this measly $30 lesson. I took the time because what I explain next usually is often mind blowing. So hold on to your hats, folks.

First Mind Blowing Lesson
In the bookings example: we could have paid someone $29 to work the extra hour after we're closed, from 8-9pm. If they took at least one order we'd still be ahead. Why? Let me put it this way. If I said, "Give me $29 and in one hour I will give you $30," would you take the offer? All day long!

Second Mind Blowing Lesson
The $30 we lost wasn't income. It was profit. Yeah, you're reading that right. Every order makes us $30 profit.

More on that soon.

Tuesday, February 5, 2008

The Margin. Part II.

What is our margin at ZMO?

Good question. Or rather, questions. Susan responded to my latte challenge by correctly inquiring, “Which margin do you want? Our plan margin? Our actual margin last closed week of fiscal year? Our margin through the holiday? Today's?”

If that makes you confused, it gets worse. Remember the definition of margin: The money that’s left over after we pay all variable expenses required to get a box out the door. That means margin changes with every box. An example:

Box A has one Ultimate Basket. Price is $200.
Box B has one Gold Label Balsamic. Price is $200.

Box A has over 20 items that need to be picked, checked & placed in a basket.
Box B has one item that gets picked, checked & placed directly in a box.

Looking at production labor alone, it’s clear the variable expenses required to get these two boxes out the door will be different. That means the margin for each order will be different. We'll ship 80,000 boxes this year. Does that mean we have 80,000 margins? In a way, yes. But don't freak out. We have a way around it.

It’s useful to recall our goal here. We’re trying to use margin to decide what the benefit is to shipping one more order. The order is in the future. We don’t know what it is yet. We have to predict it. How can we do that? Why not use an average of what happened in the past? It's probably as good a predictor as anything.

Here’s how to calculate our margin, using costs averaged over the period from August to December 2007. These are the final numbers off our December year-to-date financial statement. The real deal.

38.22% Cost of Goods including food and mistakes, subtracting shipping income
10.62% Direct Labor
1.00 % Payroll Taxes on Direct Labor
6.96 % Operating Overhead including credit card fees, etc.
3.09 % DSE Fees
4.40 % ZSN Fees

64.29% Total of all variable costs

35.71% Our Margin (100% total - 64.29%)

So who guessed closest? The latte goes to Jason who said 42.3%. Congrats. I’ll bring it to you next week.

If anyone would like a try at Latte No. 2, here’s my next pop quiz. You know our margin in percent. What's is our margin in dollars? You pick your average box size. Show your math. One winner, chosen at random from correct entries.