Two contractors were comparing notes. Each was bragging that they earned a 10% net profit that year. When I looked behind the percentages, one owner had a net profit per hour of $10 per hour, the other a net profit per hour of $50 per hour. Who was kidding whom?
Reality: Sales matter. Profits matter most. One of my favorite lines: Volume is vanity. Profits are Sanity. If you don’t know how your company really produces revenue (i.e. car wash through the number of cars that go through the car wash, a gym by the number of members, a service company by the number of billable hours) then you don’t know what the net profit per unit of revenue is.
You’re clueless about true profitability; the thing that matters most to sustaining your business for the long term.
So, how do you really see how profitable you are? By calculating your net profit per unit of revenue.
Here’s how to do it:
Net profit per unit of revenue = net operating profit / units of revenue
Many times it’s a “slap in the face” when you calculate this number for the first time. We calculated it in a recent class for contractors and the highest net profit per hour was $3.60. The lowest was less than $1. At least they were positive. (A negative net profit per hour means that you are paying your customers to provide products and services to them) .
When you calculate this number, you really see what you are taking home. You’re not looking at sales. You’re not looking at gross profit. You’re including all of your business expenses, including overhead, to see the true bottom line. You’re not fooling yourself with any other calculation based on gross profit or a percentage.
Here are the two most frequent questions that I get about calculating net profit per hour:
Question #1 – Why should I look at my profits this way?
You should be looking at your bottom line – it’s the most important part of your business. The top line is important. The gross profit line is important. But the most important line is your bottom line profit. What are you making earning for each unit of revenue?
Question #2: What should my net profit per unit of revenue be?
The answer is whatever you are comfortable with. I really don’t care about key performance indicators (KPI’s) with respect to profitability because they give you a false sense of security. If you’re above KPI for net profit per unit of revenue you relax and may not pay as much attention to your bottom line as you should.
The most important thing is the trend – is your net profit per unit of revenue increasing? Even if you are below the net profit KPI, as long as it is increasing, you are headed in the right direction. If you are above the KPI but your net profit is decreasing, then you are headed the wrong way and should take action to correct the downward trend.
I challenge you to calculate your company’s net profit per unit of revenue. What is it? Are you comfortable with it? Are you shocked by it?
If it is not enough, from your perspective, then change it. What will it take to get to the level that makes you comfortable?
If you are comfortable with your net profit per hour. Congratulations. Just keep it there or grow it even further.
How financially fit is your business?
Click here to take this one minute assessment.
This Week’s The Financially Fit Business Podcast:
How to Sell Without Looking Like You Are Selling
In the old days business just rolled in the door through referrals. You didn’t need to do any marketing.
Times have changed and marketing is now important to generate business revenue. How do you do it without selling and looking like you are selling? My guest, James Donovan, the founder of Nine Two Media and the author of Booked Solid, tells you how.
Books/Audios that could help your business and you.
AI Search Revolution describes the next phase of search. Google is no longer enough. If you don’t want to read it, give it to your marketing team and make sure that they are following the suggestions so that your company doesn’t get lost in the AI search world.
Click here to order on Amazon
Proven Operations Manuals
- Best Practices to Operate a Profitable Business
- Customizable
- HVAC, plumbing
- Residential and Commercial
Click here to get started.
Financial Statements Matter
Written in English rather than accounting babble, discover what your balance sheets and profit and loss statements are really telling you. Make better business decisions based on accurate, timely financial statements.
For Retail businesses: Click Here
For Service businesses: Click Here
For Home based businesses: Click Here
For HVAC and Plumbing businesses: Click Here
For Irrigation/Landscaping businesses: Click Here