You have likely started your own business to create a better lifestyle for you and your family and to do this, you’re probably thinking it is all about the profit you make on a job.
What about if we said your profit is a series of processes made from your business model?
This probably makes no sense however we are going to explain to you why this is the most important thing you need to know to fully understand in your business model to make the numbers work for you so you can manage and improve your profit.
Profit is the end result of Profit = Sales - Costs which is a very simplistic way of looking at it so we need to dig further to see what these numbers are made up of.
Costs are made up of four elements:
1. Variable Costs (Direct Costs)
They will change in proportion to sales, for example, direct labour costs or the cost of materials. If your sales increase by 10% so would your variable costs and vicea.
2. Fixed Costs will not change and tend to be the same value each year such as premises cost, salaries etc. Large changes in the business tend to have an impact such as hiring a new administrative assistant.
3. Stepped Costs These are fixed costs that will increase in “steps” as the business grows. This is common in manufacturing where for example, 2 machines can produce 5,000 units in total and if they want to reach 5,001 units this would require an additional machine which will result in the fixed costs stepping up.
4. Semi-Variable Costs This will be where there is a fixed element to the cost (such as a monthly phone contract) and a variable element (such as being charged per minute for going outside your call allowance).
What exactly drives sales?
Sales are made up of: The amount of customers x the amount they spend x the amount of transactions = sales
Most business owners looking to grow their business purely focus on attracting more customers, which is great but limits what your company can really achieve. Increasing your total customer number by 10% will result in 10% more customers. Simple.
However now we have established the drivers, let’s put them into action. What would happen if you acquired 10% more customers, and got the customers to spend more each time by 10% and by 10% more frequently?
So by simply pushing all 3 drivers instead of the usual 1 by a small margin, we have now increased sales by 33.1% growing your business faster compared to only attracting new customers. You are probably thinking it is easier said than done to increase your prices by 10% as now you are 10% more expensive than your competition!
It is true that by putting your prices up we are likely to lose some customers who don’t see the value in what you do, however, the number of customers you could lose will be much lower than you would expect. Sometimes it can even result in no customers being lost or even… more customers being gained!
If you increase your prices by 10% and as result, you lost 10% of your customers due to the price increase. If we take into account the reduced variable costs by 10% (because variable costs are proportional to sales), we can see that you can afford to lose 14.71% of your customers and still earn the same amount of profit!
Now you are working less but for the same profit.
When it comes to increasing your profits, it's actually a simple process. You increase your sales which you can do by acquiring more work, increasing your profit or increasing the amount customers spend with you (from above) and then reduce your expenditure.
The way you price your jobs can be one of the most misleading ways of how you understand your business. Many business owners simply put a percentage on top of the costs they have had to pay or suspect to pay out which may seem fine at the time but when we come round to looking at your gross profit margin, your figure is going to be way off!
We are going to look at Markup vs Margin which are very similar in nature but they have a big difference which can be costing you tonnes in profit. Learning the difference between the two, can help you increase your bottom line and one step closer to your profit goals.
If you want to continuing reading about how you could be pricing to make the same profit but with a smaller workload then click here to see how insights into pricing.
This article was written for Construction Insider by Saint Financial Group, a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.
Saint provides the luxury of free business consultancy for of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!
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