Dynamic Business

Revenue, Variable Costs and Gross Profit

The next step was to work out how much revenue the business needed to earn.  A lot of business owners make the mistake of focusing on the total revenue of the business. A more important figure is the revenue earned less the variable costs or ‘costs of goods sold’, that are incurred with each job. Every time Peter and his team fix a car, they are using up car parts and consumables like oil, filters etc. So the next step was to estimate what percentage of each job went in variable costs.

Sarah does the books and the first thing she realised is that they didn’t have a process for quoting. A lot of quotes were based ball on park figures and what they thought a customer would be willing to pay. As a starting point they agreed that 50% of the revenue for each job went in parts and consumable products.

This gave them one of their most important KPIs, their Gross Profit figure – the money left over from each job that was going to pay all the fixed costs, wages and profit.

We took things a bit further and looked at other KPIs like how many leads they needed, the jobs they needed to win and complete each week to achieve their targets.

If It Isn’t Written Down, It Doesn’t Exist.

They were shocked then they first saw the results but at the same time amazed at how much clarity it gave them then they saw it all written down. To start with it all seemed too difficult but within a few days of playing around with the figures and with a bit of advice, they developed some very firm strategies. They put up their prices up on some services, cut their costs, developed a process for quoting and reduced the time it took to do jobs.

It is amazing how much motivation and focus there is for business owners when they know what activities or KPIs to measure in their business so that they get the best score possible.

Peter and Sarah now know what they have to focus on to get the business performing so that they can earn a decent wage and make that $50,000 profit to pay off the mortgage.

Andrew Vincent is a business coach and creator of the Channel 9 television series Your Business Success. Over 80 of the best episodes have been re-edited into a step by step business improvement program that is supported by FREE business coaching. Go to www.yourbusinesssuccess.com.au/db to find out more and access FREE video clips to improve your business skills.