“We’re absolutely flat out.”
Those four words don’t impress me nearly as much as they used to.
You can have the phones ringing, the team working overtime, jobs booked for months and record sales hitting Xero and still be making bugger-all money.
Welcome to the wonderful world of gross profit.
Gross profit is what you have left after paying the direct costs of delivering your product or service. And yes, service businesses have direct costs too.
If you employ people who directly earn revenue; accountants, consultants, technicians, therapists, support workers, tradies or other fee-earning staff; their wages and superannuation should generally form part of your direct costs when you’re measuring gross profit.
Ignore those costs and you can give yourself a very flattering, but completely useless, gross profit number.
Imagine two Penrith businesses each turning over $2 million.
Business A has a 20 per cent gross profit margin.
That leaves $400,000 to cover overheads.
Business B has a 40 per cent gross margin.
It has $800,000.
Same impressive turnover. Completely different businesses.
And here’s the trap.
If your gross profit is too low, selling more can magnify the problem.
More staff.
More materials.
More admin. More pressure. More risk.
Everyone gets busier. Except your bank account.
So, forget asking, “How can we sell more?” for a moment.
Ask better questions.
Which products, services or jobs have our best margins? Which customers are actually profitable? Are labour costs blowing out? Have supplier increases been passed on? Are we discounting unnecessarily? Are our quoting assumptions three years out of date?
Then choose one area and investigate it.
Know your number.
Set a target. Track it monthly. And when it moves, find out why.
Because being busy isn’t the goal. Neither is impressive turnover.
The goal is making enough gross profit from every sale to build a financially unshakeable business.