Why Your Top Line isn’t Your Most Important Number
If you have ever played or watched golf, then you are probably familiar with the phrase “drive for show and putt for dough.” The idea here is, your drive can be a great and an impressive shot, but you don’t win tournaments and make money (dough) if you’re not putting well. I think this same concept applies to the way business owners think of their top-line revenue.
Many business owners that I’ve worked with are all about revenue. They believe top-line revenue will solve all their problems. However, sales without an appropriate gross profit level (money left over after you pay for people and materials to provide the work), means nothing. Revenue is your “drive for show” whereas keeping a healthy gross profit is how you “put for dough” since it directly drives profitability in your business.
I started working with a company in 2015 whose top line revenue was growing at a very impressive rate. This company had been recognized by receiving many awards that celebrated top-line growth over the past few years. It was clear that this company was growing, and the owners considered this growth to be very successful. It was not until they sat down with my team and realized while they were growing quickly, they were not experiencing the same growth in their profits. In fact, through the first six months of the year, they had lost over $100,000. They were amazed. Confused. How is it possible that they had such success in one aspect of the business, but were poised to run out of cash in just a few months?
When we dug into their numbers, it was clear that their gross profit was dramatically lower than it should have been. This company works within the construction industry and was overloaded with projects. We looked at many of these projects to see what was causing the low gross profit. We quickly found that this company was bidding consistently low on their projects to get work in the door. The way they bid the projects left them with a very thin margin that would require the jobs to go perfectly, which of course rarely happens in construction. Project after project was just digging them a deeper and deeper hole. We quickly put a plan in place to improve their estimation process and bid jobs with a higher gross profit margin. We also monitored these projects as they progressed to see if there were any unexpected changes in gross profit so that we could adjust and act quickly versus being stuck with the results at the end of the project. Through our work, this company was able to break even by year-end after starting upside down. The following year, they made a profit of $500K. Just this past year, they reached $2,000,000 on their bottom line. The focus on gross profit allowed this company to achieve its highest level of profits ever and allowed the owners to drastically improve their personal lives and the lives of their employees with this new level of profit.
Don’t get me wrong. Revenue is a very important number, just not the most important. If you can closely manage the gross profit in your business, it will directly lead to a better bottom line. If you see that your gross profit is not at the level you expect, consider the following:
Is your pricing at the level it should be? Is your price equitable between you and your clients?
Are you fully capturing all of your costs in your estimating process?
Did your team take longer to complete the work? If so, what’s the issue?
Do they need more training?
Do you have the right people in the right seat?
Are client barriers/issues causing the work to stall?
Are you overstaffed?
Are you using more subcontractors vs. employees? Subcontractors typically cost more. Is there a better mix you can use?
Are you capturing all change orders? Especially in a service business, it is hard to not have scope creep but adding scope to the work provided means you should be compensated for that extra work.
These are just a few of the reasons your gross profit could be lagging from where it should be. However, if you stay focused on your gross profit, your business profit will follow.
To learn more about how to measure and track your gross profit, pick up a copy of our new book The Prosperity Playbook and review Chapter 11. Get a PDF version for free here.