In this issue…
- The Simple Math of Profit
- 417 words, total reading time about 2 minutes
Set up correctly, your monthly P&L can provide surprising insight into the operation of your CI company – where the company did well, or not so well, and how much improvement you might be able to make in critical areas of the business.
It starts with a piece of arithmetic we call Profit Math, represented by the table below…
The Table highlights the three areas that lead to Net Operating Profit (NOP): 1) Gross Profit as a % of revenue (GM); 2) total Compensation expense as a % of revenue (COMP), and; 3) Major Operating Costs as a % of revenue (MOC). The math is simple: GM% - COMP% - MOC % = NOP%. In this case, 60% minus 30% minus 10% = 20% NOP.
Now, 20% NOP is pretty awesome. That’s why it’s shown in Blue, which indicates that 20% is at or better than the threshold for top performance shown in the scale to the right. As you can see, the three areas leading to NOP are also Blue. This is a classic profit model in our system, something we call 60-30-10.
Can an integration company really achieve 60% GM or higher?
Absolutely! Of course, how companies measure GM varies widely. In our system, where all costs EXCEPT actual costs of goods and related rebates/discounts are tracked as expenses (COMP or MOC), a GM of 60% or higher is common – some 75% of our dashboard users are showing Blue thru October, 2019.
Likewise, if you keep Compensation and Operating Costs in check, really good NOP will follow: 50% of our dashboard users have posted ytd NOP of 14.8% or higher thru October.
No Dashboards? No Problem!
The nice thing about the dashboards is they do the math for you. But you can easily calculate the Profit Math for your company, every month, once you’ve set up your accounts as per the Chart of Accounts we offered you last week. And using the scales shown in the table, you can also figure out where your company stands relative to an excellent performance in each category.
How To Improve?
Of course, once you know where you need to improve, and by how much, the trick is to then implement strategies aimed at better performance. Next time, as a small holiday gift from us to you, we’ll show you how a properly set-up P&L helps you manage improvements in the two most important areas of your business: Gross Margin & Productivity.