Business owners brag about a 10%, 15% or higher net profit. Others are trying to achieve an elusive net profit percentage they think they should have.
As long as your net profit is positive – forget about the percentage.
It’s not what you should aim for.
Aim for a net profit per hour that you are comfortable with. (Net profit per hour is total net profit divided by billable hours).
Two companies each show a 20% net profit. One earns $10 net profit per hour the other earns $50 net profit per hour. Which would you rather be?
The 20% doesn’t matter. The net profit per hour you earn does.
The next time you hear an owner bragging that he has a 20% net profit, ask him what his net profit per hour is. Yours may be higher…even with a lower net profit percentage.
Dollars on the bottom line matter. Percentages don’t.
I have reviewed and analyzed thousands of financial statements over the past 30+ years from very well run, profitable companies. In many industries, a 20% net profit on a continual, year after year basis, in my opinion, is a myth. A net profit per hour over $50 per hour on a continual basis is reality.
I can make any financial statement show a 20% net operating profit by inflating revenues and holding expenses until the next year. If you report financials on a cash basis rather than an accrual basis, this is really easy. Cash basis accounting has no accounts receivable, accounts payable, or inventory. You record a sale when you get the revenues and you record an expense when you pay a bill. Just get the cash in the door and don’t pay your bills until your next fiscal year and you can achieve a 20% net operating profit.
On an accrual basis, your gross margin is consistent and you can see true profitability from month to month because you record all revenues, whether or not you have been paid and you record all expenses, whether or not you have been paid. To achieve a 20% net operating profit, just pre-bill customers at the end of the year and don’t record supplier invoices until the following year.
I do know a very few HVAC contracting companies who have achieved this elusive 20% net profit when they had a blazing hot summer and a bitterly cold winter. They also stressed out their staff, didn’t take a reasonable salary, and didn’t hire additional people when they needed to. They burned themselves out and their staff out. Each one told me it wasn’t worth it.
If you are a smaller company working out of your house and do not pay yourself, do not have rent, utility bills, or warehouse expense on your Profit and Loss statement, you could have a 20% net operating profit. But, you really do have those expenses. You are just not accounting for them in your business. And, if you don’t pay yourself, at some point in time you will realize the business isn’t worth it.
Determine a net profit per hour you are comfortable with and price accordingly. Then you can quietly keep putting dollars in the bank when everyone else brags about a percentage that really means nothing.