Increase Profit with Informational BookkeepingFeb 14, 2022
The last couple of weeks I've been discussing WHAT informational bookkeeping does, HOW to implement it and now we're going to delve into WHY we do it: PROFIT
So let's get into it, the reason we are in business
The overall revenue of the business (ie: I have a million dollar business) that people often brag about is largely useless and often is just an ego thing. It doesn't tell you anything about how much the owner is actually taking home or whether the business will still be here next year.
Earning profit is the holy grail of business, but it's just not as simple as the net profit line on your profit & loss statement. This information is for your accountant and the tax department.
Sometimes you have to adjust your profit & loss statement for your own information.
I often export my profit & loss statement to excel to delete accounts that aren't important to my daily business running (I'm looking at you DEPRECIATION) to get a clearer picture of where we are standing compared to previous periods (we use annual due to the highly seasonal nature of our business dependent on the weather, but quarterly and monthly are also fine).
But only looking at the profit of the business as a whole once again doesn't give you all that much information. It often hides areas of the business that are under-performing so job type profit & loss calculations are more insightful.
If you have also been successful in being very specific with your expenses then if you have jobs types that solely use those specific expenses it will be very easy to then calculate to quick rough profit for each of these job types (It's not always able to be done as a quick "this much less this much" but there are other ways that take a smidge more work to calculate the more complex jobs).
Doing job by job profit & loss calculations can sometimes be quite time consuming unless you have a bigger business with a job and materials management software but the information can be priceless and used to highlight problem areas in the business. Just remember to include the costs of operating the business as well to ensure you are still making enough money on each job to cover all costs (PLUS PROFIT). I find just doing an audit of a few jobs per week is sufficient to uncover any problem areas in the business.
HOW TO INCREASE PROFIT
Now that you know which parts of your business are the most profitable/bring in the most $/you enjoy the most (HINT: This is where you should niche your business) we want to INCREASE the overall profit of the business by utilising this information.
So first & foremost you need to go through all your materials, find out what price you have been paying for them, from which supplier and how many. Now, unless it's end of financial year and you have profit to get rid of before the tax man looks, I suggest you start small. See how much you would spend in a month or a quarter and then negotiate for that amount.
There's no point getting a years worth of circuit breakers for a great price if you don't have any money to pay staff next month and go out of business.
At the start just pick one or 2 of your most commonly used materials to negotiate bulk orders for. Not only does it increase your profit straight up, it reduces wasted time for the techs heading to the supplier to grab 1 or 2 before going to site if the stock is there ready to go.
Secondly know how much money the business costs you PER HOUR. In depth instructions on how to calculate this will be included in my course being released in the 2nd half of 2022 (Click Here if you would like to be included on the waitlist to find out when it will open) but just as a reminder, don't forget things like allowance for YOUR wage/drawings along with things like electricity, rent and office employee's wages and superannuation.
As a very simple calculation, you can just take the total for the year, divide by 52 weeks for the year then divide by 38 hours for the week. Then add this amount to the hourly rate for the technician on site (which includes his annual and sick leave allowance/superannuation). Then when you have this amount you need to add profit on top (because there's no point to all the stress if there's no reward at the end) and that, PLUS TAX is your chargeout rate. I tend to take the highest costing employee's chargeout rate to form the basis of my schedule of fees so that I'm never losing money no matter who attends the job.
You may find by doing this exercise you need to increase your pricing for some job types. I find that a gradual increase of $5-10 per hour doesn't rock the boat too much with existing clients and especially in the current economic climate it is somewhat expected. Also, increasing your prices may discourage more problematic 'tyre kicker' type customers and you can focus more on keeping your easy customers happy.
Don't be afraid of a price rise, if you're not making a profit at your current pricing then your choices are between have a few unhappy customers (who are probably ones you didn't want anyways) or not being in business at all.
Have a great week!
Stay in the Loop
Keep up with the latest Blog Posts, News & Courses!
We hate SPAM. We will never sell your information, for any reason.