Grow Restoration Business Series
There is a reason it's referred to it as “the bottom line.” Net profit is more important to an owner than top line revenue and it’s more controllable. Think about it – revenue is a function of your marketing - more marketing, more sales. You have control over your activity but not over the outcome.
Net profit is a function of your operational efficiency and effectiveness - more efficient operations results in higher profits. You have control over both the activity and its outcome. After all, net profit is what the owner banks and is therefore more important that the revenue the business makes.
If the business generates revenue of $2 million and a net profit of 5% the owner has a mere $100,000 for next year’s equipment purchases, business development costs, or personal wealth building. If this meager 5% net profit could be increased to 15% that would increase discretionary cash to $300,000.
Now that is worth investing your time to get a handle on. So how do you accomplish this and what steps can you take to achieve it? Why don’t you determine your three-year average annual percentage of net profit. Let’s compare that against some benchmarks and see how well you are doing.
Identify your net profit as a percentage of gross revenue for years 2014, 2015 and projected 2016 by simply dividing your net profit by gross revenue and convert to a percentage. For example, if your gross revenue is $1.2 million and your net profit is $90,000 your net profit as a percentage is 7.5% (90,000 ÷ 1,200,000 = .075, or 7.5%). Do this for three years and then divide by three in order to get an average annual net profit percentage. This gives you the clearest picture of how well you are doing at protecting your net profits.
Industry benchmarks can place you on a performance continuum that helps compare your company against other industry leaders and may provide the motivation to want to do better. INDUSTRY NET PROFIT BENCHMARKS:
- Less than 5% = absolutely horrible (why are you even in business?)
- 5% – 10% = poor (no money for kid's college fund this year)
- 10% – 15% = average (you can't take much for yourself, but you should take something, everything else goes back into the business - again!)
- 15% – 20% = good (way to go, this is a year for personal wealth building)
- 20%+ = outstanding (you've got it all - cash flow, cash reserves, and personal wealth - truly outstanding!)
How did you do, and what do you think about your company’s profit margin? How do you go about improving net profit and what might happen if you gave as much attention to profit protection as to revenue generation? Remember, you can control the outcome of the one but not the other.
There are two primary intersecting systems to improve profits. Increase per job profits through operational efficiency such as controlling material and labor costs, squashing overspending, and purchasing key building materials through wholesale sources. Each of these steps and others improve per job profits that contribute to the bottom line.
The other is a comprehensive cash flow management system that secures the construction draw early on in the project, tracks expenses to determine per job profits and operational controls, and obtains final payment quickly when the job is completed. As with revenue growth you must plan your way to improvement and then execute well on those plans to achieve this all important goal.
This you can do – but you must know what to do and how to most effectively do it. 6 Month Coaching Plan - The Profit Maker - Make More Money Than Ever Before Managing Your Business Like a Pro! http://growmyrestorationbusiness.com/plans-pricing-new