By: Ruth King
Here are three ways to increase your profits.
#1 – Stop pricing using percentages.
You cannot take a percentage to the bank!
Imagine going to a teller and saying, “I’d like to deposit my 10% net profit, please.” Never happen.
The only thing you can deposit is dollars.
Pricing using percentages will get you in trouble. Unfortunately, many companies use a percentage to calculate sales prices, direct and overhead cost for a project.
Suppose there are two projects, each with 16 hours, one is priced at $10,000 and one at $5,000. You assign an overhead cost percentage of 25%. That means, that the one priced at $10,000 gets $2,500 of overhead cost and the one priced at $5,000 gets $1,250 of overhead cost.
This is wrong!
Both projects take the same amount of time, i.e. 16 hours, so they should get the same amount of overhead.
Also, depending on the company’s sales revenue for the year, the overhead percentage goes up or down. The costs may not. But, if you price by percentage, the percentages will be higher in lower revenue years and lower in higher revenue years…for about the same overhead dollars (ok – insurances may go up, etc. My point is that the rent percentage, if it is consistent from year to year, will be different depending on the revenues).
To be accurate, you must price using dollars and your bottom line must be dollars. The only time you should look at percentages: your gross margin (gross profit divided by sales). I don’t care what the percentage is. I care that the percentage is consistent.
#2 – Know Your Net Profit per Hour.
One thing that I always do when starting to work with a company is to calculate that company’s net profit per hour. It is calculated by taking the net profit and dividing it by billable hours. It is, unfortunately typical, for a multimillion dollar company, to have a net profit per hour lower than you can earn working for a fast food restaurant.
Why are you putting yourself through the risk, the stress, and the hard work if you are not at least earning what you could working for McDonalds or Wendy’s?
Once you know your net profit per hour – if you like it, continue to achieve that number. If you don’t like it, then set your prices, decrease costs, or increase productivity to raise it slowly.
An owner did the calculations and found that his net profit per hour was $4 per hour…which was unacceptable to him. When we did the project costing we found that one team had a consistent negative net profit per hour for all of the projects they worked on.
Training time! First explain net profit per hour and why it is important. Then show each person (in private) their net profit per hour. Then establish a plan to get the negative numbers to positive numbers and to keep the positive numbers positive.
You can post the averages each week. It becomes a competition amongst the team members.
#3 – Know Your Overhead Cost per Hour.
Overhead cost per hour is simply total overhead cost divided by billable (revenue producing) hours. If your overhead cost per hour is $50 per hour and your competitor’s overhead cost per hour is $30 per hour, then for an 8 hour project your overhead cost is $400 and your competitors is $240. Your competitor can charge the same price and earn $160 more than you do. Or, your competitor can charge $160 less and win the job.
Keep your overhead cost per hour as low as possible. Ask your team members how to shave $100 a month from overhead costs. You’ll be surprised at their answers. Implement the Simple things they suggest, whenever feasible, to decrease your overhead cost per hour.
Your bottom line will increase when you implement these three actions.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.