Monday 26 October 2020

NET Profit is the Best Measurement of Your Business's Success

Posted by at 8:33 AM

NET Profit is the Best Measurement of Your Business's Success

If you can’t operate your business to produce a 20% net profit, there is something seriously wrong with your business!

We’ve all heard of the financial term EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is a measure of a company’s profitability and strength of operations. It shows how much cash flow a company generates from its operations and depends on its operational efficiency.

When we manage well, we produce a higher EBITDA, and when we manage operations poorly, profit falls, and EBITDA drops.

Most business sales use are multiple of EBITDA to determine fair market value. The business’s value isn’t defined by its revenue but by its cash flow and profit. Make sense?

For many reasons, net profit and EBITDA are critical to every owner!

The first place owners look when net profit is lagging is fixed expenses. They evaluate the cost of insurance, rent, support staff, and other costs.

That’s NOT where the problem lies.

They then look at field staff and evaluate the number of technicians, cleaners, and marketers.

That’s NOT where the problem lies.

Next, they look at the Cost of Goods Sold. In other words, they assess what it costs to do their work. Xactimate pays COGS through three components; equipment, material, and labor.

You’re getting warm!

They evaluate the cost of materials to see if they are paying too much or buying too many.

That’s NOT where the problem lies.

The problem is always with labor!

It’s not that you are paying too high an hourly wage. Rarely is that the problem.

The problem is that hourly workers milk the clock and subcontracted workers … well, there are several problems with them.

Either subs charge you top dollar through their bid for services, or you pay twice to fix their work when you should have paid only once.

Either way, the problem is with labor. I have worked with companies who got paid $80,000 for labor on a fire rebuild, and the project manager paid $120,000 to get the work done. I have worked with contractors who got paid for 700 hours of work to complete a small fire rebuild but paid for over 1,000 hours of labor.

That’s the problem! LABOR!!

Here’s the point … if you suffer from a small net profit, the problem is with your project management and your control of labor costs. Fix that, and you will fix your net profit.

Fix your net profit, and you will increase your cash flow, cash reserves, and personal wealth building. I GUARANTEE IT!

If you’re not sure how to fix the problem, call me, and I will help you. But fix it, you must, or continue living with an underperforming net profit. Living with it is never a good idea!