Entrepreneurs hardly ever leave enough time for accounting. We get so involved in our specialties, sales efforts, daily operating issues and customer service, we are often too busy to pay attention to critical business issues.
Big mistake. Especially in the recycling business.
Many of my recycling competitors run junk equipment and offer terrible service. This is usually not because owners are oblivious, but because they look the other way when it comes to basic business principals…and Gross Profit Margin.
Obsessed with sales, sales, and more sales, they let everything else fall by the wayside, paying no attention whatsoever to Gross Profit Margin. Then, they close their eyes and hope for the best. Kind of like eating a whole box of chocolates at one time, then hoping it won’t show up on the scale later on. What they've completely missed and mistakenly overlooked is the magic number:
Gross Profit Margin.
My basic definition of Gross Profit Margin is simple. Sales minus COGS equals gross profit. COGS includes all variable costs. Gross Profit Margin is expressed by the gross profit as a percentage of sales. I assume that the gross profit must pay all of the fixed costs and then when all the bills are paid, what's left, is net profit.
In my opinion, lack of attention to this number is actually putting many people out of business! Owners fail to recognize that when business is bad it's due to one of three problems: Overhead is too high; volume is too low; or Gross Profit Margin isn't healthy. For my competition it’s always the latter.
Rise up, cut the fat, and get your Gross Profit Margin healthy!
Owners, raise your top line, trim some fat and keep a closer eye on that Gross Profit Margin number – it should be 40% at a minimum. This will leave you some coin at the end of the day – and that’s what it’s all about, isn’t it? Then, take better care of your existing equipment, buy some new equipment and step up your level of service.
Take a bite out of the Apple example.
Apple, Inc. is my favorite company – I’m a Superfan. They make great products and sell them at a premium price – and I buy a lot of these products for my business. How do I justify these premium expenses?
Easy. I'm not paying for the product I'm buying now, I'm paying for the product that I'm buying next year! How so? In 2007 I stood in line for 8 hours and paid $600 for the first generation iPhone. I could have stood in line for 8 minutes and paid $50 for something else, but then we wouldn't have the iPad in 2010. When I paid $600 for the iPhone, I wasn't really paying for the phone, I was paying for the innovation that was yet to occur. Apple uses their healthy Gross Profit Margin to invest in their own innovation - and their own innovation is what brings us these magical and revolutionary products each year. We could have paid $200 for the iPhone, but then there never would have been an iPad. We could pay $500 for a MacBook, but there never would have been a MacBook Air. When we pay these prices we're not fattening the pockets of the Apple executives and shareholders, we're actually investing in our own future of technology.
The Apple pattern at MCC.
At MCC Recycling Services, we have patterned ourselves after Apple. By maintaining a healthy Gross Profit Margin, MCC is able to invest in our own innovation every day. Simple concept, but so often overlooked.
In the meantime, my competitors barely have enough money left over to wash their crappy trucks, let alone invest in new products for their customers. At MCC our on-time rate for service pick-ups is 97%. Why? Because we run new trucks that don't break down, and we hire quality drivers. And we can afford to do this because our Gross Profit Margin is healthy.
When a customer pays more for MCC service they're actually investing in the future of our performance. Everybody wins.
Here's another example: In 2010 I created MyRecyclingReports.com. Of course, MCC was the first customer and user of the service. MCC's customers benefit from the wonderful convenience of using this web application every day. In the middle of one of the worst economic times this country has ever seen, while my competitors are fighting to stay alive, we are pouring tens of thousands of dollars into…
And it's our own healthy Gross Profit Margin that allows us to do this. Just like paying slightly more for that iPhone, my customers have invested in their own future. And it's paying them dividends every day.
Owners! Watch your Gross Profit Margin like a hawk. Walk away from cheap customers and re-invest in your own company. It's the best long-term play you'll ever make.