Money is the most important tool in your arsenal. It can buy more tools and time, invest in additional people, build personal wealth, and many other things. Yet many integrators do not know what they could or should make.
If you set your 2023 profit target as “I want to make more money than I did last year,” you’re not alone. But know that you might be settling for making good enough money instead of great.
How do you get on the path to great and improve profits without working more? Simple math.
But first, develop a purpose for the extra profit. We’ll get to the math in just a moment, but before you do anything else, determine the purpose behind the effort. Often, the purpose behind generating more profit in business is to solve problems and create opportunities, like:
- Invest in deeper staff benefits or wealth-building assets
- Build cash to purchase inventory at deeper price points, acquire smaller companies with talent, or develop a war chest for future investments
- Afford talented leadership as growth demands
- Outsource areas of the business where you lack strengths without causing financial stress
- Invest in relationship marketing, events, partnerships, etc.
Whatever your purpose, clarifying it can help you stay focused on achieving that profit.
Now, let’s do the math.
- Decouple equipment, parts, and labor from your gross margin. Many accountants include cost of labor, vehicles, maintenance, tools, insurance, and more into the cost of goods. This is great for tax accounting, but it makes it difficult to compare your gross margin to others in the industry. By treating these costs as expenses and not Cost of Goods, you create a clear metric to measure across the industry.
- Define your compensation bucket. Includes payroll dollars for everything: benefits, taxes, labor, office staff, owner’s pay, etc.
- Add in your operating (all non-payroll) costs, including sales and admin expenses, and occupancy.
- Subtract compensation and operating costs budgets from gross margin to find your net profit.
Knowing and understanding the components of your net profit will give you a solid view of your business’s outlook and inform your decisions in 2023 and beyond.
If you want to dig deeper into the profit math in the new year, sign up for an in-depth Financial Benchmarking session to get a financial scorecard to see how your business measures up and what you can do next.
Stay VITAL,
Matt & The Team
