Margin Analysis

Margin Analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Margin analysis is key to differentiating ideas from opportunities. Analyze the idea to identify the strengths of the venture. After pinpointing those strengths, ask, “What are the financial manifestations of those competitive advantages?” In other words, if the service is best, what will be the result? If fixed costs are low, how will that manifest? Are the gross margins reasonable and comparable to others in the industry? When will the venture break even? An ideal break-even point is one to two years. Finally, if the opportunity is to be implemented within a corporate organization, what is the value added to the overall corporate price-earnings ratio? That is, will the new venture’s launch affect the markets’ perception of the entire corporate price-earnings ratio?