Year-End Series #3 – How Healthy Is Your Bottom Line?
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 produces 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 produce higher profits. You have control over the activity and the outcome.
If the business generates revenue of $2 million and a net profit of 5% the owner ends with a mere $100,000 for next year’s equipment purchases, business development costs, or personal wealth. If this meager 5% net profit could be increased to 15% that would increase discretionary cash to $300,000. That outcome is worth investing as much of your effort as you put forth to boost your business’s sales.
So how do you achieve a net profit increase?
Begin by determining your three-year average annual percentage of net profit? Then we will compare that against industry benchmarks and see how well you are doing\ compared to others.
Identify your net profit as a percentage of gross revenue for years 2015, 2016 and projected 2017 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, add the three and divide by three to get an average annual net profit percentage. This gives you the clearest picture of how well you are doing at protecting your 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% = 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 good 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. The first is to increase per job profits through operational efficiency such as using Xactimate as a key management tool, control material and labor costs, and purchase key building materials through wholesale sources. Each of these steps, and others improve per job profits that contribute to the increasing the bottom line.
The second is establish a comprehensive cash flow management system that captures the construction draw early in the project, introduces a purchase order system to prevent overspending, tracks expenses to determine per job profits and assesses operational controls, and obtains final payment quickly when the job is completed.
The question is, “How do I do all that?” Aha!
6 Month Coaching Plan – The Profit Maker – Make More Money Than Ever Before Managing Your Business Like a Pro!
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