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Driving Profit

driving profitability

Turning Your Business into a Money-Making Machine

As a business owner, your goal is to grow and achieve success. To make this happen, you need to transform your venture into a money-making machine. Like any machine, your business has a primary purpose: to generate profit. But it’s not just about making money or increasing revenue.

In last month’s blog, the first installment of our three-part series based on the webinar “Don’t Work the Business, Profit from It,” we discussed the “Sixteen Parts of Your Business that Drive Revenue, Profit, and Cash Flow.” Now, in the second part of our series, we’ll take it a step further.

Businesses need to have more than just revenue; they need to make a profit. And despite what some may think—these two terms are not the same. After your business brings in revenue based on the products or services you sell and all the costs of goods and expenses are paid, you generally have your profit. To have a financially successful business that you own, that you can scale, and that you can even eventually sell if that’s what you want, you must first be profitable. And there are five parts you need in place to do that.

The Five Parts that Drive Profit

1. Cost of Goods

Costs of Goods is a term used to describe how much it costs you to provide the ‘goods’ to each sales transaction. It is measured as a percentage of your revenue. The Cost of Goods should include all the direct costs needed to deliver the end product or service to your customer. This ‘part’ drives profit because the lower you can get your Cost of Goods (as a percentage of revenue), the higher the profit.

Using our HVAC business example from the first blog “Driving Revenue”, let’s say that you install a new air conditioning system in a customer’s home, and you charge the customer $1,000. Your revenue may be $1,000, but your cost (from your supplier) to purchase that system is $600. Additionally, you incurred $200 in labor from someone on your team to install the system in your customer’s home. This means your total ‘cost’ is $800. And your Cost of Goods (as a percentage of revenue) would be calculated as follows:

  • $800 cost / $1,000 revenue = 80% Cost of Goods

The goal is to get this percentage as low as possible and get your profit as high as possible.

2. Marketing Expenses 

    Marketing Expenses are, not surprisingly, the total cost of marketing measured as a percentage of revenue. This ‘part’ drives profit because every dollar you spend on marketing should have a direct correlation to an increase in revenue. If that happens, you’ll maintain a low Marketing Expense (as a percentage of revenue) and high revenue, improving profit. If that doesn’t happen, you likely want to reevaluate your marketing strategy.

    Let’s say that your total marketing expenses in your HVAC business last year were $20,000 and your total revenue for the same time was $100,000. This means that your total marketing expenses (as a percentage of revenue) would be calculated as follows:

    • $20,000 marketing expenses / $100,000 revenue = 20% Marketing Expenses

    3. Payroll Expenses

      Payroll Expenses is the total amount of payroll not already included in Cost of Goods. This ‘part’ drives profit because every dollar you spend on payroll should have a direct correlation to an increase in profit. In other words, every employee on your team should either assist in improving revenue or reducing expenses (or both), thus improving profit.

      Let’s say that in your HVAC business you have the following people on payroll:

      • Office Manager: $60,000 per year
      • Customer Service/Order Taker: $40,000 per year   
      • One Master Technician: $90,000 per year
      • One Technician: $60,000 each per year

      This means that your total payroll per year is $250,000 plus all the related taxes and employer expenses (e.g., benefits) minus any direct labor that was already recorded in Cost of Goods (likely from your technicians).

      Let’s say that 80% of your technicians’ payroll was already recorded in Cost of Goods. That means that only 20% of the One Master Technician and Three Technicians’ payroll should be included in Payroll Expenses. That means your payroll expenses would be calculated as follows:

      • $60,000 + $40,000 + $18,000 (20% of Master Technician salary) + $12,000 (20% of Technician salary) = $130,000 Payroll Expenses.

      4. Overhead Expenses

        Overhead expenses are the total of all the operational expenses incurred that are not already included in Cost of Goods, Marketing Expenses, and Payroll Expenses. Examples of operational expenses include rent, insurance, and office supplies. This ‘part’ drives profit because every expense spent in your business should provide a ‘return on investment.’ If an expense does not provide a return, then you should not spend the money on that item or service.

        A good rule of thumb to remember is that every expense spent in your business should provide a return on investment or ROI.

        5. Other Income/Expense

          This is the total of all income and expenses that your business generates or incurs that are unrelated to your core business. An example of “Other Income” could be money received from an insurance payout after a vehicle accident involving one of your employees who was not at fault. Since this income is unrelated to your business’s core business it would be recorded as “Other Income.”

          An example of “Other Expense” could be the “writing off” of obsolete inventory that you cannot sell. For example, if you need to dispose of $50,000 worth of inventory that is not sellable, then this would be considered “Other Expense” since this expense is unrelated to your business’s core business.

          The Profit Formula 

          The above five parts all work together to increase profit. In conjunction with focusing on the strategies above, the following formula can help you determine where your business is regarding profitability:

          • Revenue (as calculated in “Driving Revenue”) minus Cost of Goods equals Gross Profit. 
          • Gross Profit minus Marketing Expenses minus Payroll Expenses minus Overhead Expenses equals Net Profit from Operations.
          • Net Profit from Operations plus Other Income minus Other Expenses equals Net Profit.

          By improving any one or more of these, your business will increase its profits. Now, imagine improving them all to help fuel your money-making machine!

          Ready to get started? Click here to download your free copy of “The 16 Parts of Your Business” eBook. You can also join our upcoming webinar, “How to Improve the Revenue and Profit in Your Business,” on June 25th, where we will discuss the five key challenges in detail.

          At Agile Planners, we take care of the numbers, so you can sleep at night. We provide strategic guidance and outsourced CFO services to companies of all sizes. We can help provide the strategy your organization needs for the growth you want. We understand that no two organizations are the same. And with our experience and financial knowledge, we can help develop the right strategic plan for your business to grow and reach its goals. Simply, we’ll be your trusted partner, so you can focus on running your organization. Contact us today to learn more about how we can help.

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