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> Most companies have really rosy gross margins, but really tight net margins, so a $100K expense will take $2.8 Million in revenue to offset it. I don’t think
by an_opabinia 5y ago
> Most companies have really rosy gross margins, but really tight net margins, so a $100K expense will take $2.8 Million in revenue to offset it.
I don’t think you are interpreting things correctly here. This is both counterintuitive and wrong.
- indymike 5y agoI'm pretty sure I'm not wrong. Source: I own three companies. The $100k and $2.8M were just examples (very thin net profit). It's equally likely you could have $100k in expense and need $200-$400K in sales to offset it if you are in a very high margin business. Regardless, what matters is that the unexpected expense will reduce profit, every time, and by framing risk in terms of profit you will help your CEO make better decisions.
- an_opabinia 5y agoYou’re not “framing the risk in terms of profit.” You’re talking about a set of equations in your head, that only you know, that come up with weird results like “it takes way more revenue to ‘offset’ an expense” because you’re holding “net” or “gross” or whatever margin constant. Which is really confusing and surprising and not how anyone I’ve ever met talks about this stuff, and they’d be equally puzzled and I don’t think would experience an illuminating or aha moment or whatever. Personally I found it a little interesting, I get what you are going for, but it’s so strange and not really useful or true.
- indymike 5y agoI think you are looking for deep insight and the point that was being made was shallow. If I make $3000 in profit, at 30% margin, I have to have $10000 in sales. It follows that if I have an unexpected expense of $300, it will require $1000 in sales to have generate enough profit to cover the expense.