Dr. is In: The Secret to Charting New Waters Part II
In the September issue, our discussion on paralellism began with a review of gross margin. Part 2 focuses on how to be more efficient with your books to achieve maximum profitability.
If you are having trouble marking up your equipment by 50 percent to achieve the target 35 percent+ margin, you might be wondering where other profitable companies are making their money. The clear answer is that there is additional profitability hidden in the labor component of the jobs. Either these profitable companies have a higher billing rate, or are more efficient with their labor dollars. I think the answer is both of the above. Both additional margin in labor and efficient labor production must be present for companies to continue to be profitable in this market.
Are your books set up in a way to measure gross margin easily on each job? Even more important, are your books set up to measure the gross margin on each cost type? Can you easily determine the margin achieved on equipment sales versus that achieved from labor revenue? I recommend you create parallelism in your Chart of Accounts in order to track your income with the same detail that you track your Cost of Goods Sold.
Without this detail, let’s see what we can learn from a standard Profit and Loss (P&L) statement. Here is a very simple Profit and Loss Statement, where all the income is lumped together.
From this statement, we can see that we have achieved a 35 percent gross margin. We can also see that our equipment costs represent about 62 percent of our costs ($600,000 ÷ $975,000) and labor represents 38 percent of our total costs ($35,000 ÷ $975,000). But we are not able to see how much of our sales came from equipment sales versus labor sales. It is only through examining our actual costs compared to our budgeted costs by line item that we can see if we are hitting our cost targets.