This is a guest post from Tony Fraser-Jones, Director at Profitable Tradie.
If you’re in business, making decent money is important. Sometimes, though, it doesn’t always work out the way you’d planned; you may find that your profits are low, or your cash flow is slow.
This can really take its toll on the overall health of your trade business, be it plumbing or electrical. Cash flow problems are one of the primary culprits of business failure.
However, most business owners and managers don’t know where or how to get started on improving their profits and cash flow. Here, we share our top tips for managing job profitability – and, in turn, improving your business’ overall profits and cash flow.
What you measure you can manage
To improve your job profitability, you must start by measuring it. Because what you measure you can manage – and you can improve what you measure.
Up your understanding
Your gross profit measure will tell you if your jobs are as profitable as they should and need to be. Gross profit reveals two crucial elements of job profitability: first, do the jobs we price have enough fat in them from the get go? If not, your jobs are unlikely to generate enough profit to cover your fixed costs and leave you with a healthy profit at the end of the month or year.
Second, gross profit highlights the productivity of your team. Are your guys getting through the work within the hours allowed? Is there too much down-time? Is there too much rework or disorganisation around scheduling and client requirements (code word for builders who aren’t well organised)?
How to calculate and manage your gross profit
Gross profit is calculated using the following formula: Sales less Cost of Goods Sold, where the Cost of Goods Sold are the direct costs of doing the job.
The trick is to be clear on what is included and is not included in the Cost of Goods Sold.
Wages, materials, subcontractors and equipment hire are in. Some people get tripped up when it comes to wages; remember, only ‘on the tools’ wages are included. Any office or management salaries such as an estimator or operations manager are included in your overhead costs.
If, as the business owner, you’re on the tools (or even part-time), you include that portion of your wages in your Costs of Goods Sold. Otherwise, your Cost of Goods Sold will be understated and your gross profit overstated.
Gross profit can measure the profit on each individual job, as well as the profitability across your business over a given time period, usually a month and a year.
Manage, then improve
Once you’re up to speed with measuring your job profitability (or gross profit), the next step is to improve it. Gross profit is the engine room of your business; increased gross profit will give you more cash and the ability to reinvest in your business and improve your overall net profit.
Pricing your jobs for a target gross profit margin is a great start to improving your job profitability. Make sure you have a target gross profit margin rather than simply adding a markup to your quotes or charge-up invoices.
You’ll also want to look into your team’s productivity. Using tools such as quality assurance checklists, structured ordering process, key performance indicators, team incentives and performance reviews will improve your gross profit.