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 “putt 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.