To achieve a good net profit, how much gross profit should you earn in each of your divisions?
I have written on this topic before, and with my upcoming Financial Master Class, I am revisiting this pivotal financial discussion on gross profits to drive home key insights.
Net profit is not (only) driven by gross profit.
Some companies, and divisions, can achieve high gross profit but still end up with a low net profit.
And with other companies it’s vice versa. They achieve a low gross profit but end up with a high net profit.
If you diagram Gross Profit Margin (GPM) vs Net Profit Margin, you will see there are 4 types of landscape profit models in the world.
HIGH OCTANE: High GPM, High Net
These are companies that have benchmarked their numbers, figured out how to maximize pricing, client value, operational efficiency, and overhead.
These companies should have great cash flow if they are low debt and have optimized the use of their equipment.
UNREALIZED POTENTIAL: High GPM, Low Net
This type of company has figured out how to make margin with what they sell, but they have not yet figured out how to scale properly and/or how to manage their overhead.
This company has potential but must move decisively to unlock the opportunities in front of them.
LEAN AND MEAN: Low GPM, High Net
This type of company is competing, rightly or wrongly, on its pricing and margins. Or it has simply not grasped how to price or manage its work. Or it’s a general contractor subbing all out its work.
Fortunately, this company also keeps its overhead so low that it is making good money, at least for now. But the question remains, is it sustainable and can it scale its business with such lean overhead?
RUNNING ON EMPTY: Low GPM, Low Net
This company is in deep trouble, underpricing, under-executing, and under-performing, even if its crews are highly trained. It may grow each year but it’s a struggle and a cash suck.
This company is weak and could blow over in a strong storm. Having a strong balance sheet is meant to protect you from bad weather, but this type of company is in the biggest danger.
Your Challenge: Figure out your underlying strengths and how to exploit them in order to move the needle on both your gross and net profit margins
The surprising dynamic that I have witnessed in my consulting and coaching of over 350 green industry companies, is that most firms don’t realize how to take advantage of their strengths.
As a society, we are focused on our weaknesses and we overlook what truly sets us apart, as people and as a company.
For example, when I assess a company to uncover the different areas for profit improvement, I am often happily surprised to identify opportunities where they can better exploit an already strong division!
But most firms are focused on seeking to bolster their weak divisions.
Sometimes the value comes from exploiting where a company is already doing well.
Think of it as a war-time battle; you can overwhelm your opponent with an overwhelming advantage.
Should you also fix the weak division? Yes, of course, but making money in an integrated mixed-service company can require counterintuitive moves in order to unlock the value of one’s brand and business.
Good luck this coming year!
P.S. Learn how you score in terms of Divisional GPMs and Company Net Profit vs the industry, and where move the needle on both, by joining my Financial Master Class.
The early bird for this event ends this month.