Blended Gross Profit Margins

[Notarealsignguy]

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.

I get what you're saying and you're right about replacing equipment and staying modern, you have to. Thing is, how do you plan to get beyond such a low margin without either raising prices or running your machines into the ground? Replacing equipment and the depreciation associated with it is a fixed cost in this business, it's not something you can put off in the wholesale world of printing. If you're buying equipment to increase efficiency then wouldn't the additional margin already be realized? If you're just sandbagging here, I get that too.

 

[Gino]

I don't know the actual numbers, but for some businesses, things are based on pennies. The food industry is a prime example and we do a lotta work for that industry. I would imagine, if your numbers are ihgh enough, your profits need not be so high. Passing your savings along can keep your prices down and still be productive and still keep your doors open successfully.

 

[Christian @ 2CT Media]

We are a 1 and 2 blend.

 

[FireSprint.com]

I get what you're saying and you're right about replacing equipment and staying modern, you have to. Thing is, how do you plan to get beyond such a low margin without either raising prices or running your machines into the ground? Replacing equipment and the depreciation associated with it is a fixed cost in this business, it's not something you can put off in the wholesale world of printing. If you're buying equipment to increase efficiency then wouldn't the additional margin already be realized? If you're just sandbagging here, I get that too

Not sandbagging. 10% net on millions in sales is a pretty nice nut if we can hold onto it.

That's my point on the equipment though. I don't believe one can depreciate in this business any slower than your loans are repaid. I consider net profit after we pay for equipment.

For example, let's say we buy a $60,000 printer. Monthly loan payment is $1100 for 60 months (with interest). I'll figure our net profit for the month after we depreciate $1100. Even if the monthly loan is less, because we put a down payment down or just purchased outright, we still figure a 1/60th expense on the equipment every month.

This way, in 60 months, when we are likely to need another printer, we'll get anther one, and maintain our net profit.

If the printer is actually worth something, or doesnt need to be replaced just yet, that's just gravy

 

[Notarealsignguy]

Not sandbagging. 10% net on millions in sales is a pretty nice nut if we can hold onto it.

That's my point on the equipment though. I don't believe one can depreciate in this business any slower than your loans are repaid. I consider net profit after we pay for equipment.

For example, let's say we buy a $60,000 printer. Monthly loan payment is $1100 for 60 months (with interest). I'll figure our net profit for the month after we depreciate $1100. Even if the monthly loan is less, because we put a down payment down or just purchased outright, we still figure a 1/60th expense on the equipment every month.

This way, in 60 months, when we are likely to need another printer, we'll get anther one, and maintain our net profit.

If the printer is actually worth something, or doesnt need to be replaced just yet, that's just gravy

I got ya. I don't think there's any benefit to a slower depreciation schedule unless you're running a corp as an employee and your bonus is profit dependent. Bad thing with that scenario is if you have to dump the machine that's on a strung out depreciation, you may take a loss which gigs your bonus too. I'm not a fan of section 179 either unless you're paying cash. It really sucks borrowing money and having nothing to offset the payment come tax time... after the 1st year of course.

 

[neon benders]

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.

pushed the neon equipment into the corner......aaahhhh...

 

[signheremd]

Fascinating conversation. Not sure what the original point of this thread was - how to price product, or how to check profitability? I worked for one of the sign franchises at a corporate owned store many years ago. We always had a basic rule that helped frame cost of a product: 25% material costs, 25% labor, 25% overhead (rent, electricity, equipment), and 25% profit. On things purchased for resale, markup standard is 40%.

Another thing is often overlooked is turns. So big businesses can run on a lower profit margin by utilizing turns - which is how frequently you can take your investment in materials and sell as product and then do it again. For example, if I price a skid of coroplast such that I make 40% profit on each sign, but it takes me 8 weeks to sell that many signs I can make a 40% on goods sold. But if I can price such that I make 10% profit and sell a skid a week, over 8 weeks I have taken that same original investment in materials and "turned" it over 8 times - thus making an 80% profit, or twice the profit of pricing at 40%.

Now for most of sign shops, increasing volume has more to do with marketing and quality than price. At a large scale, and for large projects, price becomes a large factor. I feel strongly that one should consider the total investment in materials and look at the amount of time that investment will to turn back into cash for profit and re-investment into materials for the next project. Big customers often want 30 or 60 days to pay after completion, while most suppliers want to paid within 30 days. Small customers often pay at completion, so small investments can turn around quickly. A company that prints coroplast for you, like Firesprint, does so quickly, so even focusing on high volume, turns can be relatively fast but not as fast as lettering Joe the Plumber's van.

Looking at another business type, both my father and great uncle were plumbers. Uncle Arthur told my dad that he was successful because he focused on domestic repairs - payment at the completion of job and low risk of lack of payment. Dad had a lot of builders courting him - long times between payments, more invested and at risk. Some builders go under and you have to fight to get your material costs back. But when it runs smoothly, you get large volumes of work.

My point is big volume can mean big profits on a low margin, but risks are higher. Small volumes jobs can have high profit margins and more turns with lower risk.

Just a bit of food for thought.