Profitability

Whilst cash is vital in the short-term, profitability is vital in the medium-term. The two key percentage figures are the gross profit percentage and the net profit percentage. Gross profit is calculated by deducting the cost of materials and direct labour from the sales figures whilst net profit is arrived at after deducting all overheads. Possible reasons for changes in the gross profit percentage are:

  • not taking full account of increases in materials and wages in the pricing of jobs
  • too generous discount terms being offered
  • poor management, over-manning, waste and pilferage of materials
  • too much down-time on equipment which is in need of replacement.

If net profit is deteriorating after the deduction of an appropriate reward for your own efforts, including an amount for your own personal tax liability, you should review each item of overhead expenditure in detail asking the following questions:

  • can savings be made in non-productive staff?
  • is sub-contracting possible and would it be cheaper?
  • have all possible energy-saving methods been fully explored?
  • do the company's vehicles spend too much time in the yard and can they be shared or their number reduced?
  • is the expenditure on advertising producing sales - review in association with 'marketing' above?
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