The Most Epic Post on Gross Profit Ever Written for Small Service Businesses

#entrepreneur #contractors #contracting #business #leadership

I barely made it through Junior High Algebra.

Geometry kicked my teeth in on more than one occasion.

Even now, when my oldest son brings home Fractions homework and asks me a question I start to feel nauseous and the room spins!

I’m simply a dude that has hated any kind of ‘math’ for most of my life.

Everything changed when I increased our profits by over $100k

It was 2006 and our growing painting company had just exploded past our sales goal of $550k and hit $851k…not bad for year three, no marketing and not paying attention to the math!

Sounds great…year three of your business killing the revenue projections! But, there’s more to the story.

We didn’t have any money. Sure, we had some money, but we were always struggling to pay bills. My business partner & I were tired of not making the type of dough we wanted, so we got smart, got a coach and started paying attention to a couple things. We made adjustments to the highest impact things in the business.

Since that time, the company has gone on to perform thousands of paint jobs, collect millions of dollars and has made good money. It all started with very basic math. Below, I will share how we went from having a lot of revenue and no profits to making a profit.

We chose to focus on one thing: Gross Profit

With some basic math skills you can turn your business around. If you can add, subtract, multiply & divide, you can be a Superhero business owner. Why were we Superhero’s? Because, in the first year of our focus on the math we actually did about $90k less revenue and made $110k more in Gross Profit than the year before. That means we worked less and made more.

Gross Profit (GP) Defined

If you sell your service for $1000 and you pay out $600 in labor, labor burden (taxes, etc), supplies, materials, permits, will have $400 left. This $400 is your Gross Profit. In this case, your GP is 40% of the revenue. That means for every dollar you sold and collected you keep $.40 to run the business.

Gross Profit is found by subtracting the Direct Costs (Costs of Goods Sold) from the revenue. Direct Costs are anything you need to pay in order to produce your product or service.

Revenue                          $1000

Direct Costs                    $600

Money left is Gross Profit: $400 in this example.

There are really only 2 ways to increase your GP:

  1. Raise your sale price while keeping your Direct Costs the same
  2. Lower your Direct Costs

Gross Profit is an indicator

Understanding what your numbers mean will help you run a better business. For example, a low GP can be an indicator or poor management, poor sales skills, poor production by the team or just a reflection of the market. A high GP can indicate the opposite. Either way, you need to know why you have the GP you have. You need to pay attention. Your job as the CEO of your business is to make sure you keep as much of the revenue that comes into the business as possible! Gross Profit is usually the lowest hanging fruit in regards to increasing your bottom line.

What is Gross Profit used for?

You’ve heard of Overhead, right? Overhead is everything in your business that needs to be paid even if you don’t have any revenue coming in. This is rent, fuel, phones, your salary, your office staff salary, etc…

Gross Profit money is what you have left to pay the bills (overhead).  If your GP is too low, then you start to get jammed up with your vendors, the gas card doesn’t work and you can’t pay yourself.

By focusing on controlling your Direct Costs & increasing your sales rates you will raise your Gross Profit. Even a couple of percentage points can have a nice impact on your business (if you do $300k in revenue and currently have a 35% GP and are able to increase your GP by 5% you will keep an additional $15,000 this year)! See example:

Revenue          $300,000                       35% GP = $105,000

Revenue          $300,000                       40% GP = $120,000

Difference: $15,000 more left over for Overhead

We taught our team about: Gross Profit

Our painting company, Jalapeno Paint Werx, consistently experiences much higher Gross Profits than the industry average. One reason is that we got our team on board with why it was important.

We brought all of our Crew Leaders in over the course of several weeks and had training sessions. We taught them what Gross Profit was and why it was important. We began to measure the Gross Profit of each project and set an acceptable minimum and even wrote it into their job descriptions. We did this because they were the project managers. That means they needed to ultimately be responsible for the outcome of the job.

Here are a few of the ‘Why’s’ we gave our team:

  • A high GP meant more money left for paid time off & vacations
  • A high GP meant the possibility of a profit sharing plan
  • A high GP meant we could weather the tough times and possibly not lay anyone off when most in our industry did (we’ve not done any layoffs since we focused on GP)
  • A high GP meant more marketing money which in turn meant more work for the team
  • A high GP meant we could stand behind our work and honor our warranties (no profits, no business…no business…no warranty)

I could go on, but you get the point. The result of this training? Our Gross Profit increased 20% over the next year.

We only measured Gross Profit

Sure, there are many things to keep track of in a business: leads, sales, etc…but, when we looked at the math and saw how big and fast an impact raising the Gross Profit could have on our company, that’s where we put of eyes most of the time. What we focus on, talk about and measure gets better.

Each business has unique challenges and will need help in different areas, but as I coach contractors, by far the #1 issue I see is a low Gross Profit. Raise the GP and it will create momentum! Life is always better when you have a little more money left over!

One More Thing…

You may have heard of a thing in business called the ‘Break-Even Point.’ This is basically when your company zero’s out and breaks even on the money. Raising your Gross Profit will actually LOWER your break-even amount. Check this out:

If your overhead each month is $15k (salary, phones, etc…) and you are consistently getting a 35% Gross Profit, then your break-even amount each month is: $42,857

We find that by taking your overhead and dividing it by your Gross Profit ($15,000 divided by .35)

This means that if you get a 35% GP on the revenue that comes in, you need to sell, produce and collect almost $43,000 just to zero out and make no profit.

Check out what it looks like if you have a Gross Profit of 40%

$15,000 divided by .40 = $37,500

That means you can sell almost $5500 less and hit your break-even point!

By raising your Gross Profit you need less leads and less sales to survive.

Anything over your Break-Even Point is what we call NET Profit.

If you need help raising your gross profit I’d love to talk with you and see if one of my programs would be a good fit.