Gross Profit vs Net Profit

Dec 6, 2021 | Growth Tips, Income

To achieve a good net profit, how much gross profit should you earn in each of your divisions?

That depends…

Your profitability is not always driven by your gross profit.

Here is what I mean.

Some companies can achieve high gross profit but still end up with a low net profit, and other companies are 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 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.

To achieve a good net profit, how much gross profit should you earn in each of your divisions? Share on X

 

High GPM, Low Net

This type of company has figured out how to make money 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.

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). Fortunately, this company also keeps its overhead so low that it is making good money, at least for now. But can it scale its business with such lean overhead?

Low GPM, Low Net

This company is in deep trouble, underpricing, under-executing, and underperforming, even if its crews are highly trained. It may grow each year but it’s a struggle. 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 how to move the needle on both your gross and net profit margins

The surprising dynamic that I have witnessed in my 50 years in this industry (yikes, since the age of 7), is that companies don’t realize how to take advantage of their strengths.

As a society, we are so focused on our weaknesses that we overlook what truly sets us apart.

For example, when I assess a company to identify the areas for profit improvement, I am often happily surprised to identify how to better exploit an already strong division, where they are already making good margins, versus spending too much time trying to seek better profits from a weak division.

Sometimes the value comes from focusing even more on where a company is already doing well.

Should we 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.

If you want to learn how you score in terms of GPM and Net Profit, and how to move the needle on both, join our Financial Master Class.

Registration closes in seven days, on December 14th, so sign up now and get prepared to learn where you are leaving money on the table!