Dr. is In: The Secret to Charting New Waters Part II
Instead, let’s look at a P&L that is set up using parallelism, where we break out our sales into the same categories that we use to break out our costs.
Now, we learn that even though we achieved a 35 percent overall gross margin, we actually achieved a 33 percent margin on equipment and a 38 percent margin on labor.
We can also see that the source of our sales is 60 percent equipment ($900,000 ÷ $1,500,000). This may look like many ESC’s P&L’s in previous years. However, what happens if you decide that you can’t sell enough jobs with a 50 percent markup on equipment and you reduce that markup? If you still want to maintain sales of $1.5 million, you’ll need to sell more labor. And if the markup on equipment falls, you’ll need to make more money on your labor as well. So, at this point, not only do you have to sell more labor, you have to find a way to increase the margin you earn on labor.
Let’s look at one more P&L; one where we sell the same amount of equipment ($600,000), but with a reduced markup. In this case we use a 33 percent markup to achieve a 25 percent margin on equipment.
We also increase the total labor sales to make sure we operate at the same total sales of $1.5 million. And we mark up up our labor enough to make sure we still achieve a total combined gross margin of 35 percent.
By creating a P&L with parallel categories, we can not only continue to measure our gross margin, but we can see the financial effects of changes in the equipment markup and labor billing rates.
So, as we approach new business models, perhaps selling different types of products and services, now is the time to change the structure of your accounts so that your P&L Statement can help you determine the success of charting these new waters.