Incremental Improvements

As a business owner, you juggle multiple tasks: managing a team, handling clients, bringing in new leads and making sure projects run smoothly. Among these, one critical responsibility is often neglected: ensuring profitability. We think about, worry about and hope for profit but often don’t do anything to actually improve net profit.

 In a previous article, “The Dramatic Effects of Small Changes,” I introduced what I call the 1% Rule. In this article, we’ll review the rule and show how businesses have used it to make small changes with big effects. 

The power of a 1% increase

The 1% rule states that if the average business increases its gross profit margin by 1%, it will increase its net profit by 14.5%.

 Here’s why it works: Small businesses on average keep only 7% of their sales as net profit. Increasing the gross profit margin by 1% — for example, from 35% to 36% — raises net profit from 7% to 8% of sales. In dollars, that’s an increase from $70,000 net profit on $1 million in sales to $80,000 net profit. 

A $70,000 profit is profit, but you may not be satisfied with it. It’s not enough to justify the risks and efforts involved in generating $1 million dollars in sales.

 If your business is averaging a 7% profit margin and you’re not satisfied, you might be wondering: What can I do that doesn’t require a huge investment in time or money but gives meaningful results?

 The good news is that you don’t need to overhaul your entire operation to see meaningful improvements. In fact, small changes can lead to big results.

 It’s easier to achieve than you think. Below are 10 simple actions that real small businesses have taken to increase their profitability.

Simple ways to increase your gross profit margins

1. Raise your prices by 1%. It’s straightforward and painless. It boosts your net profit without requiring more sales.
2. Pass along credit card charges. Credit card fees eat into your profits. By slightly increasing your invoices to cover these costs, you protect your net profit.
3. Install vending machines for employees. This idea came from a friend. He was tired of his four-man crews (times six trucks) each spending an hour a day at the convenience store on their way to and from jobsites. The change not only helped his labor cost per job but also enabled each of his crews to do at least one more job per month.
4. Have a contractor fuel your equipment and vehicles at night, at your shop. This is the same principle and has the same effect as vending machines in the shop. The trucks and equipment are ready to go without needing to stop by the gas station. Don’t write off the idea until you’ve checked. Fueling contractors are surprisingly affordable.
5. Buy back inventory. This idea was introduced to me by a contractor who had a lot of material like sandcrete, PVC pipe, sheetrock and grout that were easier to abandon at a job than to return the shop. My client now buys back this salvaged inventory from his guys at the end of a job. The job is clean, nothing is wasted. My client pays a fraction of the new price for the material, benefiting both parties.
6. Set clear labor hours in bids. Your laborers should know the bid hours for the job. They are responsible for hitting the goal and should at least know what they are. You can also pay your labor the bid rate even if it takes fewer hours to do the job, which acts as an incentive and shows if you have been missing your labor cost estimate.
7. Implement change orders. Use written change orders for every change. Many more contractors claim to use change orders than actually do. Change orders help assure you will be paid for changes and preserve your margins on jobs, ensuring you’re compensated for extra efforts beyond the original agreement.
8. Maintain accurate and updated bidding costs. Many contractors use out-of-date pricing lists. Because prices generally go up, this means they will pay more for parts, materials and subs than they planned for in their bid
9. Use checklists. Implement tailgate job checklists to ensure all trucks are ready with tools and materials. This reduces multiple trips chasing parts and minimizes errors and rework.
10. Adopt real-time job costing accounting. Job costing is tracking the amounts you spent on a job versus what you planned to spend. Done in real time, job costing will show you your real gross margins so you can make changes.

Making it happen

Change can be exhausting, especially when you’re managing the day-to-day operations of your business. However, the ideas outlined above are simple, actionable and worthwhile. Here’s how you can get started:

1. Assess your current operations: Look at your profit margins. You cannot manage what you do not measure.
2. Choose your strategy: Select one of the above-mentioned strategies — or find your own. Choose anything that helps you do more with less and aligns with your business needs and goals.
3. Implement gradually: Introduce these changes one at a time. Pay attention to the results and monitor their impact on your gross profit margins. Make any necessary adjustments.
4. Monitor your progress: Use real-time accounting to track your progress and ensure the changes are positively affecting your profitability.
5. Expand as needed: There are always opportunities to become more efficient. Keep at it and continue seeking ways to improve.

By implementing these strategies, you can transform your business’s profitability without extensive overhauls. Start small, stay consistent and watch as minor adjustments lead to significant financial gains.

Final thoughts

Increasing your net profit should not be a daunting task, especially after you’ve seen how small changes can have a big impact. By focusing on raising your gross profit margin by just 1% — and then again — you set your company on a path to continual improvement and a substantial increase in your net profit. The effort may be modest, but the rewards can be mighty.