That’s a pretty bold claim…promising to increase profits in just one month.
But, it can be done. The question is “How bad do you want it?” If you as the owner of your small business truly don’t want to increase profits, you won’t. You will find a number of excuses as to why it can’t be done or why you’re too busy to make it happen.
Before we talk about increasing your profits, let’s define the types of “profit” you need to focus on.
This is the money you have left after you pay to produce your ‘widget.’ Whatever your product or service is, there are costs that you get to pay in order to ‘deliver the goods.’ Check out a quick example of the math:
Sale Price of Your Thing $1000.00
Direct Costs You Get To Pay (direct labor, labor burden, materials, etc..) $600.00
Money Left Over (Sale Price – Direct Costs) $400.00
This $400 bucks left over is your Gross Profit. In this case, it’s 40% of the sale price. This means you have $400 left over that needs to be used to pay your bills…your Overhead.
For a more in-depth discussion on Gross Profit check this out: The Most Epic Post Ever Written on Gross Profit for Small Service Businesses!
This is the amount of Gross Profit money you have left AFTER your Overhead is paid. Again, let’s check out some math!
Yearly Sales Revenue $1,000,000
Direct Costs $600,000
Gross Profit $400,000
Yearly Overhead (salaried employees, marketing, phones, rent, etc..), whatever get’s paid even if you don’t sell any ‘widgets.’
Our pretend yearly Overhead $385,000
Money Left Over (this is the NET Profit) $15,000
This $15k is the money you get for having your tail on the line as the owner. This is your reward.
How to Increase Your Profits Now
In order to raise your NET profit, one of two things need to be done:
- Lower Your Overhead
- Increase Your Gross Profit Money
In this post I want to talk about raising your Gross Profit. I continue to pound this because this is usually the place that most service businesses stick it to themselves. And, the #1 area that gross profit money is lost is through your direct labor costs. Labor is expensive. Usually more expensive than you think.
I believe most employers, to their credit, want to treat their employees well. This can also be detrimental to their success. I believe the best way to increase your Gross Profit is to make sure your employees have some skin in the game. Just like a professional athlete, our employees should feel some pressure to perform. Don’t you, as their employer…the one signing the checks…want them bringing their best every day? Don’t you need to perform at a winning level in order to win in business? Do you feel pressure to perform?
How Labor Gets Away From Us
Direct Labor costs can quickly eat away at profits when one or more of these things happen:
- Unclear expectations of the time estimated for a task
- Little or no accountability for the time given for a task
- Paying above industry wages for less than kick-butt performance
- Paying 100% of their wage for less than 100% of their effort
Employees, whether by simple human nature or by being sneaky thieves, will not consistently give their best for you unless they have some skin in the game. If they get their pay no matter how they produce are you really getting their best?
20% Increase in Gross Profit in 1 Month
I have a contractor client that hadn’t been watching his labor costs very close. He was actually paying about average wages for the work being done, but was losing money because the company production rates were out of whack. He would assign an hour to a particular task and the task would be done in an hour…or maybe even 90 minutes without any consequence. His gross profit percentage was 29% when we began our Assault on Lost Labor Hours.
The first thing we did was to evaluate the times he was giving for certain tasks. We made sure that if the time given for hanging a door was an hour, it could be accomplished if the employee remained focused and maintained quality. Labor production rates should not be easily accomplished, but pursued with an intentional focus. This requires your employee to ‘be there’ during the work day.
Next, we fired anyone who was not an ‘A’ or ‘B’ player. Yes. Fired. Gone. Cut. Let go. If a winning attitude wasn’t there you got to leave. Then, we gave the better employees a reason to win more.
We approached the ‘winners’ with a new compensation plan. For this contractor, the best move was to create a ‘pay for performance’ system. There are many types of compensation systems and none should ever be implemented without a deep examination of how the company and the team will be impacted and that all of your state employment laws are followed. In short, the system we put in place provided the employees with a base pay (higher than their pay before we dumped the ‘losers’) and then an opportunity to make more per hour based upon their performance. If they beat the time they made more. If there were no quality call-backs they made more. The contractor basically said “If you work here, you will have some skin in the game.”
The Results of Taking Control of Labor Costs
After one month we evaluated the changes made and then high-fived each other! The company Gross Profit increased by 20% in that first month. In the language of dollars, that means they kept $20 more out of each $100 collected in revenue. This business brought in $78,450 in revenue during the first month of the change. The owner was able to keep $15,690 more to be used for overhead.
After three month of this we did a previous year comparison. Here’s how it went down:
4th Quarter 2011
Gross Profit $55,578
4th Quarter 2012
Gross Profit $86,395
In 2012, they did less in revenue, but made more money. Pretty cool, huh?
In 2011, they had $55,578 left to pay the bills. In 2012…almost $90k. That’s a game-changer!
The company monthly overhead during those same time periods was about $25k…give or take a few hundred dollars. With that in mind, the contractor went about $19,000 in the hole in 2011 during the fourth quarter. They tapped their line of credit and got a bit jammed up with a few vendors.
In 2012 they made about $11,000 instead of losing anything. All because he focused on making sure everyone had skin in the game.
Not every company is losing that much money on labor. But, we can almost always find ways to increase your Gross Profit by 5-10% without having to cut employee pay. Employees want to win. They want to be appreciated and recognized. They also want to be held accountable. At least that’s what the best employees want. Make sure you keep your ‘winners’ and lose the ‘losers.’ Make your company culture one of high accountability and performance. When the best employees are given a fair system that will reward them for bringing their best each day (or call them out when they don’t) you will build a reputation as someone who pays well and then the best will want to come work for you.
I urge you to take a hard look at your labor costs and take control where needed. Maybe it’s time to create a system that will put the ball in their court and let them step up and grab the opportunity to earn more…but only in the context of you getting yours as a small business owner.