Business Finances, Profits

What Actions Lead to Profits?


The goal of every business is to make money or a profit.  For some reason profits seem to elude some businesses more than others.  They are working hard day in and day out, but they seem to just be spinning their wheels and not getting anywhere.  They are trapped in the American dream treadmill, moving faster and faster but going nowhere.

The reason they are working so hard and not seeing any fruits from their labor is that their actions are in the areas that do not lead to the profitability of the business.  We are busy, but we are spending our time with non-productive activities.

So what is a productive activity?  The definition is very simple.  An action that moves us toward making money is productive and an action that leads away from making money is non-productive.

In business we have to realize that “people working” and “making money” are now the same thing.  Once we understand this, we can now look at our business from a different perspective.  We now need to look at our profitability per activity.  So now we can start looking at a different set of metrics to measure how profitable a particular job or activity is in our business.

The financial measurements we now have to look at to see if we are making money are:

[1] Net Profit    [2] ROI – Return on Investment    [3] Cash Flow.

We need to determine our Profit KPI’s (key performance indicators) by determining profit per….

  • Direct labor hour
  • Team member
  • Transaction or Job
  • Customer
  • Product or Service

The first area you should look at is gross profit per labor hour.  This will help you to determine what types of jobs you should focus on to increase your overall profits.  Let’s take a look at this example…

Job A Job B
Revenue $3,900 $9,000
Material Costs $2,250 $3,000
Labor Costs $450 $2,500
Direct COGS $2,700 $5,500
Gross Profits $1,200 $3,500
Gross Profit Margins 30.8% 38.9%
# of Labor Hours 18 100
Gross Profit per Labor Hr. $67.00 $35.00
Determine Labor Hr per month
10 Techs @40 hrs 

(@90% compactly * 4.3 wks)

36 hrs per tech

 

1560/hrs

 

1560/hrs

Gross Profit per Month $104,520 $54,640

In this example we are comparing 2 different types of jobs.  At first glance, Job B has a higher gross profit margin and seems to be more profitable.   However, when you further analyze the gross profit per labor hour, doing more of Job A type jobs can double the profitability of your business.

By understanding this, we can now direct our marketing to target more “A” type jobs.   Or, we can look at how we can be more efficient with Job B type jobs to reduce our labor hours per job.  Once we implement these 2 basic strategies we can begin to learn how to work smarter and not harder in our business.

 

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About stevegoranson

I coach emerging & successful business owners and their teams who have Hit a brick wall and are looking to break through. Through our business coaching services we bring clarity to how business owners and professionals run and manage their business so they can achieve better results. I’m the guy you call if you want to make more profits, work less hour, and build a team to get your business working so you don’t have so you can enjoy more life.
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