Marina Dock Age, January/February 1998

Don’t let Profit Margins Slip
by Dennis P. Kissman

Do you ever get the feeling that your ships store, fuel dock and parts department are not contributing to your profitability as they did a few years ago? Just passing along the cost increase to the consumer is not enough. I have seen many marina operators look at the raw numbers without ever looking at the percentages between sales and cost.  

I have heard talk about how profit margins are shrinking when, in fact, it is the cost of sales percentage to sales. For example, look at how terms are used. An item in the ships store costs $74, and it sells for $135. The difference is $61. That is the amount used to cover overhead and operating costs. What is left is profit.

If you are going to remain profitable, the number you want to focus on is the profit margin. By maintaining an acceptable profit margin as your business grows, your profits will also grow. Too often, it seems that there is a real profit, while in reality, the margin is continually shrinking.

One of the easiest areas for this to occur is at the fuel dock, where costs often fluctuate from delivery to delivery. For consistency, consider the above example and assume the cost of the item increases by 3 percent. That means you have now paid $76.22 for the same item. If you follow the policy of passing costs along to the customer, your new sales price becomes $137.22. Under this scenario, you still have $61 to cover costs and make a profit. Not really better off, are you?

Now look at how the percentages changed. The cost of sales as a percentage of sales is $55.5 percent, the markup is 80 percent, and the margin is down to 44.5 percent. Your profitability on sales has decreased by 0.7 of 1 percent. This may not sound like much, but if this happens throughout your organization, you have a real problem. These pennies soon add up to dollars.

Remember, you want to keep a consistent profit margin if you intend to grow the business. First, review how to compute profit margins. To calculate profit margin, take the difference between the sales price and the cost and divide by the sales price: ($135 - $74)/$135 = 45.2 percent. Now look at what the sales price should be if the cost went up the 3 percent, as in the example. Use the same formula to calculate sales price when both the cost and profit margins are known. But unless you like playing with algebra, it can get a little tricky: $74/(1 - 45.2 percent) = $135.

There is a simple solution using percentages. If you know what percentage your cost went up, simply multiply your old sales price by 100 percent plus the percentage increase (3 percent per the example) to arrive at the new selling price with your desired profit margin. For example, the new cost is $76.22, an increase of 3 percent. The old selling price was $135. If you multiply the old selling price by 103 percent, you get the new selling price of $139.05 at a 45.2 percent profit margin. This now means you have $62.83 to cover your costs and realize a profit.

Most of us believe we are too busy to involve ourselves in this level of detail, but it will make the difference in the end. The big problems would not occur in the first place.