It’s common for trades business owners, and business owners in general, to focus on their sales figure as a measure of how well their business is doing. This may give you some insight, however it doesn’t give the full picture. For trades businesses especially, gross profit percentage (GP%) is a much more important figure to focus on when it comes to measuring success.
What is Gross Profit percentage
Gross profit percentage is the amount of profit you make on your business’s sales. For example if you invoice a customer £5,000 for a job, all of that isn’t profit and some of it will cover the cost of materials, wages, sub-contractors etc. involved in carrying out the job, and depending on how well you have managed your costs, you may only be left with a small percentage of the £5,000. The higher your gross profit percentage, the better. There are ways of increasing your GP% which we will explain later.
Gross Profit Percentage Vs Turnover (Example)
If you put all of your focus into making more sales and increasing turnover, and forget about GP%, there’s a likelihood that you are not going to make as much money as you potentially could.
Let’s look at an example:
Scenario 1 –
Bob owns a small plumbing business and his turnover for the year is £120,000
He looks at all his direct costs and works out that his GP% is 54%
This means his gross profit for the year is £64,800.
Scenario 2 –
In this scenario, Bob makes £100,000 in sales, £20,000 less than before.
…but this time his GP% is 66%
This means that his gross profit is £79, 200
Even though Bob sells £20,000 less in scenario 2, he makes £14,400 more in profit.
He makes more profit for less work.
So, how does he do it?
Ways of increasing Gross Profit Percentage for trades businesses
Trades businesses are in a great position when it comes to increasing GP%, as there are numerous variables to change due to the complex business structure.
If you get some of the following things wrong, it will negatively affect your businesses GP%, however, if you get it right, you can make more money without having to sell more.
The following are some things which can affect your GP% are:
- Pricing – Have you looked at how you are pricing your services? If you are selling your services too cheaply, it is difficult to make a profit. One of the simplest ways of increasing your profit is by increasing your price. As long as the service you are providing is valuable and you are trusted, a small increase in price can go a long way. If the price of your services is very low it is likely you will have a high turnover, a lot of work to do, and little to show for it in the way of profit. Read more on pricing here.
- Material Costs/suppliers – Are you purchasing your materials in a cost-efficient way? Do you have a regular supplier who you could negotiate a deal with? Do you keep waste to a minimum? A regular review of your suppliers and costs is recommended to ensure you are working in the most efficient way.
- Sub-contractor costs
- Direct wages
- Discounting services – Discounting your services results in you working more for less profit. Your turnover may look great, but does it actually cover all your costs and leave you with a profit? There’s no point doing lots of extra work if you aren’t making a return on it. It’s important to take this into consideration when thinking about discounting services. If what you are selling is valuable, then the price should reflect that.
Make more money, save time, and reduce stress
The complex structure of trades businesses means there is a lot of potential for trades business owners to grow and develop their businesses. With many different variables to play around with, there is a lot of scope for strategic planning and development of your business.
If you are a trades business owner with aspirations to grow your business, get in touch. We can help you understand the vital numbers within your business, help you create a plan and set achievable goals, and give you the accountability you need to stay on track.
We have a number of services at Rosslyn Associates which can help you develop a more successful trades business, such as Business Planning, Cashflow forecasting, Monthly and Quarterly Coaching, and KPI Improvement, you can check out the all of our services here.
Join our next free webinar on Thursday 27th May – Understanding the Numbers in Your Trades Business
The benefits of attending:
• Learn what each of your key financial reports tells you about your business
• Identify strengths, weaknesses and trends
• Discover why your bank account balance may not reflect profits
• Discover the key drivers of business value
• Learn what the numbers mean so you know what to do to improve them
Plus, we’ll provide you with a complimentary Guide to Your Financial Reports.
You can also access all of our previous webinars here!
Book a free 1-hour, no-obligation meeting today
We offer business owners a free 1-hour Proactive Accounting Meeting. We’ll use the time to discuss:
- Your goals for your business and how you plan to achieve them
- How your business goals tie in with your personal and lifestyle goals
- Issues or challenges you face in your business
To arrange a meeting, book a discovery call here.
Get in touch if you have any questions
As always, if you have any questions for us, relating to this blog or otherwise, get in touch! You can email firstname.lastname@example.org or call 0131 445 1825 to leave a message and one of the team will get back to you. If you are a client already, you can get in touch directly with your client manager!