Running a business should be fuelled by two different purposes – the first is to provide quality goods and services to a market that has an unmet need, and the second is to make a profit in order to sustain the entrepreneur’s own personal and business needs and preferences. Making these two ends meet can be difficult, but will ultimately dictate the price of the products and services being offered.
Margin recovery is an important factor that needs to be understood by any business owner – old or new – in order to put the right price tag on their wares so they can meet costs, make profits, and provide consumers with products and services that are within their budget’s reach.
Understanding Margin Recovery
In order to best understand margin recovery, it’s ideal that we first explore the different expenses incurred when putting up a business.
Your capital expenditures refers to the cost of the machines, equipment, facilities (if purchased), and other initial expenses that you need to make in order to run your business. Take a printing service for example; the money they spend on the computers, printers, furniture, and other one-time purchases that are used in their facilities to render services all fall under capital expenditures. This value is depreciated over time, and will be recovered within a certain period through sales. Meeting these costs with profits is what is called in the business realm as capital recovery – that is, the process of re-earning what you initially spend on capital expenses.
Your overhead expenses or operating expenses refers to the cost that recurs and needs to be repaid as your business goes along. Electricity, water, and employee wages are good examples. For the same printing service, you can consider the paper, ink, and other consumables as part of the overhead expenses.
In order to make a profit, you should be able to anticipate the amount of sales your business will make in a given period and compute how much should be added to that value in order to recover what you spent for both your operating and capital expenses. When capital expenses are met, any profits you make beyond breakeven are considered part of margin recovery.
Therefore, margin recovery is any amount that you earn beyond the point of capital recovery, and does not pay for any operating expenses or any other spendings related to your business. Basically, anything that falls within margin recovery is pure profit, and can serve any purpose that the business owner deems necessary – for either personal use or for the growth and development of their brand.