First, are you busy or are you productively busy?
Join me this Thursday, June 26th at 11 AM Eastern to discover how easy it is to answer this question for your company…in less than 10 minutes. After I review the productivity ratio, I’ll answer any financial questions you have.
Click here to register for this complimentary webinar.
Onto Profitable Business…
Now that you have the basics and why you want to increase your company’s profitability, let’s continue ways to increase profitability.
#4 – Stop pricing using percentages.
You cannot take a percentage to the bank!
Imagine going to a teller and saying, “I’d like to deposit my 10% net profit, please.” Never happen.
The only thing you can deposit is dollars.
Pricing using percentages will get you in trouble. Unfortunately, many companies use a percentage to calculate sales prices, direct and overhead cost for a project.
Suppose there are two projects, each with 16 hours, one is priced at $10,000 and one at $5,000. You assign an overhead cost percentage of 25%. That means, that the one priced at $10,000 gets $2,500 of overhead cost and the one priced at $5,000 gets $1,250 of overhead cost.
This is wrong!
Both projects take the same amount of time, i.e. 16 hours, so they should get the same amount of overhead.
Also, depending on the company’s sales revenue for the year, the overhead percentage goes up or down. The costs may not. But, if you price by percentage, the percentages will be higher in lower revenue years and lower in higher revenue years…for about the same overhead dollars (ok – insurances may go up, etc. My point is that the rent percentage, if it is consistent from year to year, will be different depending on the revenues).
To be accurate, you must price using dollars and your bottom line must be dollars. The only time you should look at percentages: your gross margin (gross profit divided by sales). I don’t care what the percentage is. I care that the percentage is consistent.
#5 – Know Your Net Profit per Unit.
One thing that I always do when starting to work with a business owner is to calculate that contractor’s net profit per unit of revenue. It is calculated by taking the net profit and dividing it by that unit of revenue (i.e. for a car wash it is the number of cars).
Once you know your net profit per unit – if you like it, continue to achieve that number. If you don’t like it, then set your prices, decrease costs, or increase productivity to raise it slowly.
Next week, more ways to increase your profitability.
______________________________________________________________
How financially fit is your business?
Click here to take this one minute assessment.
Books/Audios that could help your business and you.
Casey Brown makes an interesting case for whether you should raise prices and how to raise prices if you decide to do so. She has implemented what she suggests in the book and gives you stories from companies she has helped change their pricing strategy.
Click here to order on Amazon: