Blended Gross Profit Margins

[Grace Custom]

Kinda new to the industry, but not too running a business. Pricing has been my biggest hurdle. I seem to be a little below the middle of the road in my area on pricing (closer to the bottom) and I know that I have room to come up. Just curious what is everyone hitting for blended gross margins? 30%? 40%? higher?

Thanks

 

[kcollinsdesign]

Because of the mix of revenue streams in our shop, knowing the blended GM is less useful than knowing net profit for individual product and service lines. Overhead costs factor differently depending on what is being sold. I can say with some confidence that if we don't hit at least 10% net profit (after all expenses, including depreciation), then we reconsider the viability of offering the product or the service. 20% net profit is a healthier goal, but can be difficult in a competitive market.

One of the persistent problems I see with small shops (under $4M annual revenues) is not considering depreciation. A shop can look profitable while the asset value of the equipment is decreasing. Once the assets are exhausted, profits will plummet (if the business can even stay afloat)!

 

[FireSprint.com]

Because of the mix of revenue streams in our shop, knowing the blended GM is less useful than knowing net profit for individual product and service lines. Overhead costs factor differently depending on what is being sold. I can say with some confidence that if we don't hit at least 10% net profit (after all expenses, including depreciation), then we reconsider the viability of offering the product or the service. 20% net profit is a healthier goal, but can be difficult in a competitive market.

I agree with this. We run much closer to 10% net profit as a wholesale printer though.

I like to have my accountant give us reports assuming that all our equipment will depreciate evenly month to month for 5 years (regardless of how we actually paid for it). Pretty rare that a piece of equipment will be worth anything after 5 years anyway.

There are so many different specialties in this industry it's challenging to put a good number on it.

 

[Notarealsignguy]

10%? Oof!

 

[Notarealsignguy]

Because of the mix of revenue streams in our shop, knowing the blended GM is less useful than knowing net profit for individual product and service lines. Overhead costs factor differently depending on what is being sold. I can say with some confidence that if we don't hit at least 10% net profit (after all expenses, including depreciation), then we reconsider the viability of offering the product or the service. 20% net profit is a healthier goal, but can be difficult in a competitive market.

One of the persistent problems I see with small shops (under $4M annual revenues) is not considering depreciation. A shop can look profitable while the asset value of the equipment is decreasing. Once the assets are exhausted, profits will plummet (if the business can even stay afloat)!

I thought you were a home based designer? If you produced your products yourself, 20% would be real easy to hit and youd still be one of the cheapest in town.

 

[kcollinsdesign]

I thought you were a home based designer? If you produced your products yourself, 20% would be real easy to hit and youd still be one of the cheapest in town.

You may be right. We average 40% GPM on out-sourced products before overhead, which, like I said, varies. I also have 25 years experience owning and operating a full service sign company. I am currently on the payroll of a construction company with a sign division which I manage. They have the resources, manpower and equipment needed for installation and service work. Installation, service, and maintenance is by far our biggest revenue stream, and it is something the internet companies cannot offer.

I was a home based designer for a number of years. I will be 64 in a few days, and I enjoy going to the shop and working with people, then being able to go home and step away from it. I'll probably keep doing this for while.

 

[FireSprint.com]

I might just be dumb, but we have to be careful here. Gross Profit and Net profit have lots of different names and meanings. It might be fruitful to define what we are talking about here.

Net profit really should be what the investors take home after all the business expenses are paid. If the investor (Owner) operates the business and is there for 60 hours a week, her wages should be taken out of net profit. Net profit is what's left after the business has paid for everything it needs to operate.

 

[Reveal1]

True, often misused , but only one meaning as they are fundamental accounting principles:
Gross Profit = Revenue minus Cost of goods. Does not include fixed costs. Expressed as $
Net Profit Margin = Revenue minusCost of goods+expenses+interest+taxes), divided by Revenue. Expressed as %
Gross Margin = Gross Profit divide by Revenue. Expressed as %
Blended Gross Margin is the average gross margin of several divisions or product lines

Best source I've found is investopedia.com A great site for all things financial. Everyone owning or operating a business should have these terms down cold.

 

[Christian @ 2CT Media]

I agree with this. We run much closer to 10% net profit as a wholesale printer though.

I like to have my accountant give us reports assuming that all our equipment will depreciate evenly month to month for 5 years (regardless of how we actually paid for it). Pretty rare that a piece of equipment will be worth anything after 5 years anyway.

There are so many different specialties in this industry it's challenging to put a good number on it.

I don't know how you do it... I would go insane at 10% net profit, I would find it hard to run a business at that slim of a safety net.

But you have a great volume business that warrants 10% as you have consistency of growth.

 

[White Haus]

I don't know how you do it... I would go insane at 10% net profit, I would find it hard to run a business at that slim of a safety net.

But you have a great volume business that warrants 10% as you have consistency of growth.

I take it your net profit is much higher than 10% ? Ours definitely fluctuates around 10-20% throughout the year, depending on what we're working on. Then again our nut is pretty big in comparison to our sales volume. (Working on it)
I'd love to hear what other companies shoot for or are satisfied with.
For the first time ever, I'm working on projections and was shooting for 15% net profit year over year.
Thanks.

 

[netsol]

Interesting thread.
I am in the awkward position of being an old hand & a newbie at 5he same time
40 years experience fixing plotter, wide format printers &the like, but when I complete a sign job to
Sell it, it is often my first time doing that type of product.

While I have learned a hell of a lot from reading posts by ken Collins, pricing is not an area where we will find common ground.

I miss the “sign contractor’s pricing guide” which gave you a nationwide average for just about any type of signage or printing. I do not need a work sheet to calculate my monthly expenses. I need a starting point, a rough figure to look at, if nothing else, to answer the question, would it be worth making this type of sign?

 

[netsol]

Ken, this was not a personal attack, it’s just that this is really the only area where one of us seems to be getting it wrong. I always read your posts

 

[netsol]

And sorry for going off on a tangent

 

[kcollinsdesign]

I might just be dumb, but we have to be careful here. Gross Profit and Net profit have lots of different names and meanings. It might be fruitful to define what we are talking about here.

Net profit really should be what the investors take home after all the business expenses are paid. If the investor (Owner) operates the business and is there for 60 hours a week, her wages should be taken out of net profit. Net profit is what's left after the business has paid for everything it needs to operate.

Same definition for net profit. The money that is left over after everything, including all salaries, taxes, overhead, expenses, etc. is paid for. Everybody here gets a salary, including the owner.
Goss profit is revenues minus cost of goods sold.
We shoot for 20% net profit, but usually fall around 15%.

 

[kcollinsdesign]

Interesting thread.
I am in the awkward position of being an old hand & a newbie at 5he same time
40 years experience fixing plotter, wide format printers &the like, but when I complete a sign job to
Sell it, it is often my first time doing that type of product.

While I have learned a hell of a lot from reading posts by ken Collins, pricing is not an area where we will find common ground.

I miss the “sign contractor’s pricing guide” which gave you a nationwide average for just about any type of signage or printing. I do not need a work sheet to calculate my monthly expenses. I need a starting point, a rough figure to look at, if nothing else, to answer the question, would it be worth making this type of sign?

I gradually started outsourcing, starting with Gemini letters and channel letters, then moving to cabinet signs. When wholesale printing started coming down, we just pushed the printer and laminator into a corner to collect dust. Ditto the welder, neon plant, overhead conveyors, MAP paint system, spray booth, and eventually the big shop. Kept the trucks running, though. Can't buy installation on the internet.

 

[Notarealsignguy]

I might just be dumb, but we have to be careful here. Gross Profit and Net profit have lots of different names and meanings. It might be fruitful to define what we are talking about here.

Net profit really should be what the investors take home after all the business expenses are paid. If the investor (Owner) operates the business and is there for 60 hours a week, her wages should be taken out of net profit. Net profit is what's left after the business has paid for everything it needs to operate.

That's how I always looked at it and assumed that's what was being talked about. 10% just seems too tight for me. I aim for 40% and usually end up at 25-28%.

 

[Christian @ 2CT Media]

We have averaged 38% for the last four years. We quickly weed out low-margin products or increase our prices. Now, that's not including all of our depeciation and etc. When you factor that we are below 20%.

 

[Notarealsignguy]

We have averaged 38% for the last four years. We quickly weed out low-margin products or increase our prices. Now, that's not including all of our depeciation and etc. When you factor that we are below 20%.

You have to factor in depreciation, it's a real cost. What's 38% if you're excluding the equipment that's producing the product? That number is meaningless.

 

[Christian @ 2CT Media]

I'm not excluding it, but we rapid write off everything if its not paid for in cash. So traditionally if it's financed you are not deprectiating it all in one year. If you take the traditional approach like Gene described and depreciate over 5 years we have higher Net Profit.

 

[FireSprint.com]

I am very hard on our net profit since we have no outside investors and have no intention of selling anytime soon. We always include depreciation on a 60 month scale since equipment in this business isn't really worth much after 5 years or so. (We report on taxes differently, but I don't want to see our books optimize for taxes for 90% of the year.)

That brings me to my next point. I believe a business can be optimized for a few different things:

Growth - Lower profit margins due to constant reinvestment in people and equipment <- We are, and have been, here for 13 years.... (Buying the bigger printer before you really need it)
Sustained Profitability - Higher profit margins and owner wages, while reinvesting to maintain that profit over long periods of time..... (Maintaining the medium printer, and replacing it every 5-7 years)
Preparing to Sell - Highest profit margins, typically over 2-5 years. This will get the best bang for the buck when selling, but may not be sustainable. Future investment will be required..... (Repairing the medium printer until you can't get parts)

Or of course, a blend of the 3. You might apply the growth mindset to one department and a preparing to sell mindset to another department.