25 Ways to Increase Profitability – Part 3

25 Ways to Increase Profitability – Part 3

Now that you have the basics and why you want to increase your company’s profitability, let’s continue ways to increase profitability.

#4 – 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.

#5 – Know Your Net Profit per Hour.

One thing that I always do when starting to work with a contractor is to calculate that contractor’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 contractor, 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.

A contractor did the calculations and found that his net profit per hour was $4 per hour…which was unacceptable to him. When we did the job costing we found that one crew had a consistent negative net profit per hour for all of the jobs they installed. And, there were some service technicians whose net profit per hour was negative too.

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 installation crews and service technicians. Everyone wins: the customers who are educated about their HVAC systems, the field personnel who may get SPIFFs for achieving a certain level, and the company.

Next week, more ways to increase your profitability.

_______________________________________________________________________________

How financially fit is your business?

Click here to take this one minute assessment.

____________________________________________________________________________________

2025 In Person Class Schedule – Understanding Financial Trends Analysis – This is geared toward CPA’s – however you can take it too!

• July, 29, 2025 – Austin, TX
• August 27, 2025 – Anchorage, AK
• September 10, 2025 – Atlanta, GA

Click Here for more information