Margins

The primary purpose of any for-profit business is to make a margin.

If we could skip all the other stuff – staff, offices, operations, marketing, HR, legal, management, strategy, sales and procurement etc – and go straight to the margin, we would.

Given that’s the case, from a sales perspective the primary function of any B2B contract is to protect the margin. You can think of that protection in two ways.

1. Less immediate protection: limitations of liability, that kind of thing.

2. More immediate protection: inflation protection, scope creep, payment terms, interest on late payment. Basically, anything that protects the margin in the here and now.

What’s most surprising is how feebly most businesses act to defend their margin. In the “more immediate” category, untracked inflation is a major source of damage.

Capping your yearly inflation adjustment at 3% might not sound too bad, but if inflation is running at 7%, then you have an exposure of 4% a year.

Again, 4% doesn’t sound too bad but, if your margin is 20%, that is 20% of your margin gone after the first year. Next year it’s a total of 40%, and the year after it is 60% of your margin that’s gone.

More on margin in forthcoming issues, but the moral for now is: if you are not actively defending the margin in your contracts, then you’re not a for-profit business.

26 November 2024