What is your P&L failing to tell you? Part 3 Taking Aim At A Bigger Bottom Line.
In this issue…
Two weeks ago we showed you the simple math of profitability, represented by the table below…
Profitability starts with Gross Margin – if you don’t make enough profit on the goods you sell, you won’t have enough money to pay your people and operating costs and still have a healthy profit left over.
CI companies sell two classes of goods: system components, typically purchased specifically for a project, and; system infrastructure like wire and cables and connectors and all kinds of other pieces/parts, used to interconnect and install the components. CI companies add value to these goods by providing the design, installation, & programming services that make everything work.
There’s Margin in the Mix
How much a company sells of each of these three categories – a measure we call Mix – has much to do with overall Gross Margin. Parts, for example, can be (should be) priced at 2.5-3X their cost, resulting in a margin of over 60%. Equipment, while representing a greater number of revenue dollars, typically produces a margin of 50% or less (in the case of TV’s & Sonos, a lot less). Managing your revenue mix to include a healthier amount of Parts leads to higher overall Gross Margins.
Optimized financial modeling indicates Parts should be about 10% of overall project revenues, which is easily measured if you set up your income and COGS accounts as recommended in Part I of this series (December 10).
Want to improve profits immediately? Add another 2% of miscellaneous Parts charges to every project you propose. Don’t wait for next year. Start today!
You MUST Make Money on Labor
How much should you pay your techs? We get asked all the time, and the answer is simple: technicians should produce billed labor revenues equal to 2.5-3X their annual gross pay. A $40,000/year technician should produce $100K+ in labor revenues; a $50K technician $125K+; a $60K technician $150K+.
By having accounts for labor revenues and labor wages, separate from all other revenues and wages, your P&L will make it easy for you to calculate your margin on labor (revenues minus wages = GP. Simple!). If it’s less than 60%, there is room for improvement.
How to improve, immediately? Increase the mix of labor in your projects. If you’ve been averaging a 30% labor mix, up your allocation to 33% or 34% of the project total. If you’ve been averaging 33-34% but your labor margin is still under 60%, you might need to go to a labor mix of 36%, 38%, or even 40%. The fastest way to make more is to charge more.
Most CI’s don’t charge enough. You can change that in your company, starting today. Two simple options exist: 1) make sure your billing rate is at least 4 x the average wage rate, and/or, 2) raise the estimate (your guess) on how many hours will be required to complete the work.
Review, review, review.
Every month, after all the numbers are in, run your P&L. Check your GM. Check your Parts mix. Check your Labor margin. As your GM improves, you’ll notice your bottom line improving, too. And if you want to make it really easy to review these and many other key components of productivity & profitability, sign up for our dashboard service. You can watch a 3-minute video about what the dashboards tell you by clicking here.
Better performance starts with using your QuickBooks strategically. You have the software, use it with the right business process. It matters.
Where to begin improving, immediately
599 words, total reading time 3 minutes