This is an article I wrote for my DIY Chat Forum. (I have a section there that is hidden from public and is for the PW'ing contractors so no one sees it)
How To Make More and Do More
Numbers analysis is a tricky thing. There are guys that will take up arms when you say their company nets 25% of gross billing. These are usually one man shows and are indicative of not understanding what each number means. I'm going to show you how raising your prices ten percent will increase your net profit by 40% as well as ultimately increase your volume. What?? Raise prices AND get more work? Read on.
Definition of Net Profit
First its important to clarify what net profit is. This is whats left over after ALL expenses. I think where many people get confused is that they add in the amount they take out of the business (salary) as part of the net profits. Net profit is what your company
makes at the end of the year, not what you make. If your business is setup properly, you pay yourself a salary. That salary is a constant. Its your compensation for your role in the company (your job). Let's make it simple and say you pay yourself $1,000 per week, every week all year. That's $52 K per year. That's barely enough to support a two kid household with a mortgage unless you have a wife/partner that also makes money but its a round number.
That money disappears from the business every week as an indirect labor expense regardless of whether you do 20 jobs or just one. Understanding the terms overhead, direct costs, indirect costs, depreciation, gross profit and the ilk, I'll leave for another conversation. For now we'll just call them "expenses". Back to the topic at hand.
Lets say you billed for $150,000 in 2007. Your "expenses" totalled $115,000. Again that includes materials, owner salary, employee payroll, insurance, truck payments, equipment depreciation, advertising.. everything. The money left over is 35,000. This is the company's money also known as "cash flow" or "net profit". It represents 23%.
Here Is Where One Should Take Notice
Now, in 2008 you decide to raise your prices. The first thing you have to do is factor your cost of doing business and raise based upon that. This compensates for increased gas prices, rising chemical costs etc. I add 3% every year. This is a profit neutral raise. It breaks you even for last year. But lets say you are tired of doing 300 jobs per year to make your gross of $150K. You decide to raise your prices by an additional 10%. Your Housewash goes from $.10 per s/f to $.113 per s/f. Your decks go from $1.50 per s/f to $1.69 per s/f. You think your customers are going to abandon you for that little of an increase? Some may, but so what.. here's why.
Its unlikely you will lose much business with a 10% increase. To keep things simple to understand in scenario one, we'll say everything stays the same. You still do your 300 jobs. Instead of doing $150K in '08 you'll do $165,000.
All your other expenses are also the same (your cost of doing business price raise compensated for any rises in gas etc). Now your company net profit went from $35,000 to $50,000. There's your 40% increase.
Guess what you can do with that extra $15,000? First, give yourself a raise of $5,000 per year (try getting that in the corporate world). That means you now have an additional $10,000 sitting in your company coffers. Upgrade your equipment, enhance your image or what I like to do.. invest it in advertising. $10,000 will yield me $100,000 in work.
"So let me see if I am summing this up correctly. By raising my prices ten percent I can make more money for myself as well as nearly double my volume?" Yep.
Last Note: Some guys may say "if I raise my prices I will close less sales" Perhaps. But all your other expenses like payroll and materials will also drop so in the worst case scenario, you still get the raise and don't work as hard.
I know this sounds too good to be true but it is what it is. Please, ask questions or throw out your thoughts. I am far from the be all end all authority in business. I'd like to hear from you guys.
Above article copyright Ken Fenner and PressurePros, Inc