One of our clients once said, “Volume is vanity. Profit is sanity.” As in, you can do all the business you want, but what’s the point if you don’t make more money?
Now, most integrators – most companies, really – can readily cite their sales volume. But far more important to their profitability is their Gross Margin. Focus on GM, working to make it bigger, and you’ll start making more money instantly.
In the VITAL system, there are five data-points that drive overall GM:
Equipment mix & margin
Parts mix & margin
Mix is the % of total revenues that comes from each category. Margin is the % difference between how much you charge for Equipment and Parts, and how much you pay for those goods. Labor cost is not included in our top-line margin calculations, nor are any other expenses like freight or travel costs. By keeping COGS “pure” – the cost of goods and nothing but the cost of goods – we are readily able to compare Gross Margins across companies.
And when we do, we find that a margin of 60% or higher is readily attainable. Here’s an example of “margin math” that gets you to 60%...
It is revealing to note how significant parts & labor are in the GM calculation. While Equipment accounts for over half the revenue dollars, it represents only 1/3 of the GM points. Parts and Labor together contribute twice as much overall GM.
At the same time, clients are less sensitive to pricing of Parts and Labor, than they are to the pricing of the major system components. It’s easy to boost the parts allocation of a project by 2 points – that’s only $400 on a $20,000 project. And if you also boost the labor allocation by two points – another $400, who’s going to notice? – your project now has $800 more gross profit than it did before.
Do this every project, and suddenly you’ve got 4 extra points at the top. That’s $40K/year for the average CEDIA company, and $100K for a company doing $2.5M.
Data Set-up & Resources
To readily track mix and margin, you need to set up the three income accounts – Equipment, Parts, and Labor – and the two COGS accounts (Equipment and Parts). You then need to assign each product and service in your list to one of the 3 income accounts. We talked about how to do this in last week’s Coffee, and even offered two resources you would need to set-it up yourself.
If you didn’t download them last week, here’s that link again…
Be driven to do better. The data will tell you how!