Principles to Increase Operating Margins

The quickest and easiest way to make a business more valuable is to understand the drivers of top-line revenue and analyze margins on a customer, product, and market basis. Use these proven principles as you strengthen your organization and increase operating margins.

There are several specific challenges that bring outside consultants together with clients. There is only one common reason that sticks out most. They hire us to make them better companies. After all, who doesn’t want to get better at what they do and be more profitable?

The easiest way to make a business generate more successful is to first understand the drivers for top-line revenue notably pricing strategies and analyze margins on a customer, product, and market basis.

Determine if Cash Flow is Priority

Driving top line revenue is important to most companies however some organizations prefer to maximize cash flow, particularly those that have limited funding resources or must return cash to the ownership group. This means that evaluating payment terms, discounts, and collectability is as important as the price. In some cases, getting 98% of your list price in 15 days is preferable to having working capital tied up with customers who pay 100% of your list price but take 90 days to do it.

Constantly evaluate available inventory

Even the most well-run organizations typically have excess inventory and well-run ones have constant updates to action plans on how to liquidate that inventory, particularly if they’re running low on cash.  S It may be wise to strategize to realize higher prices when you have limited inventory and long lead times.

Understand Your Total Costs

Maximizing returns on heavy investments in capital equipment requires that those machines be kept running. But to keep those machines running, it may make sense to lower your prices for certain products; this may not achieve a break-even point for the product measured against fully absorbed cost, but it may provide an adequate contribution to fixed costs.

Of course, this theme won’t work if your production doesn’t cover your fixed and other costs. Management must fully understand whether the combination of winner or fast-moving products and contributing products cover all costs and provide the necessary return on investment.

Understand the Limitations

Good pricing is dependent on generating and analyzing underlying data. Best practices at high performance organizations include data-driven principles and discipline in determining quoted prices. A good example of using data is developing market segmentation strategies that create new customers at multiple price points. 

These principles are the foundation to increasing your operating margins.


Article by: Rakesh Parikh

Rakesh is a Managing Director and founding member of Pivot Capital LLC. As a registered certified public accountant, he’s spent the past 20 years in private practice as the founder of One Capital Financial Advisors, Inc. advising clients in accounting and financial services including audits, reviews, compilations, valuations, tax advice and LLCS corporate preparation. His work also includes mergers and acquisition advisor, certified exit planning advisor to small business and family partnerships as well as due diligence in buyer-side target acquisitions.

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