To compute the potential profit that your company is leaving on the table answer the following questions: (Note that when you are asked what it “should” have been be honest—what should it have been given the circumstances of the past 12 months)
WHAT WERE YOUR GROSS REVENUES OVER THE LAST YEAR?
WHAT DO YOU THINK THAT THEY SHOULD HAVE BEEN?
WHAT IS YOUR AVERAGE GROSS PROFIT %?
WHAT WAS YOUR NET PROFIT OVER THE LAST YEAR AS A PERCENTAGE OF SALES?
WHAT NET PROFIT DO YOU THINK THAT YOU SHOULD HAVE MADE?
Now the calculation.
1. Subtract what you think sales should have been from what they were.
2. Multiply that answer times your average Gross Profit %.
3. Then subtract the Net Profit % that you should have made from the Net Profit % that you actually made and multiply that amount times your actual Gross Revenues from the past year (the first question).
4. Add together the results from steps 2 and 3.
This gives you the amount of profit that you lost over the last year had you reached the sales and net profit that you believe that you should have made.
Gross Revenues of $1,000,000
They should have been $1,200,000
Difference–$200,000 x average Gross Profit of 20% = $40,000
Actual Net Profit 2% but should have been 10% is 8% difference x $1,000,000 = $80,000
This company is leaving $120,000 (80+40) on the table each year! Or $20,000 per month! Or nearly $5,000 per week–$1,000 per day!!!!
So how did your company do? It’s probably worth investing some money to fix it.