By: Ruth King
Net Profit per unit of revenue is a concept that most company owners don’t think about.
The question to ask is: “What product/service produces the unit of revenue for your company?” It’s not sales – it’s sales of what product/service/or combination that produces the revenues.
Here are some examples:
- A restaurant generates revenues from each meal served
- A car wash generates revenue from each car that gets washed
- A home or office service company generates revenue from each billable hour.
- A gym generates revenue from each membership
Now ask this question: “What is the net profit for each unit of revenue?”
For example:
- The net profit per meal served is $X
- The net profit per car washed is $Y
- The net profit per billable service hour is $Z
- The net profit per gym member is $A
To determine the net profit per unit, you must know the overhead cost per unit.
Let’s take the car wash example.
A car wash overhead in 2022 was $100,000 and there were 25,000 cars that got washed in 2022. The overhead cost per car is $100,000/25,000 or $4/car.
This means that your client must subtract $4 from the gross profit per car to determine the profit per car.
Let’s take the service company example.
A heating and air conditioning company had 15,000 billable hours (not including vacations, holidays, meetings, etc. that can’t be billed to the customer). The overhead cost for the year was $600,000. The overhead cost per hour $600,000/15,000 or $40/hr.
Net profit per unit should be consistent or increasing.
If net profit per unit is consistent:
- Revenue and costs are consistent from month to month.
- Billable (revenue producing) hours are consistent from month to month.
- Revenues are not seasonal
If net profit per unit is increasing:
- There are seasonal revenues and this is a month with higher revenues
- The company is producing products/services at higher profit
- The company is producing products/services with less unbillable time
- Overhead cost per hour is decreasing
- The company hasn’t properly accounted for billable (revenue producing) hours
- The company hasn’t accounted for all of its costs in the profit and loss statement
If net profit per unit is decreasing:
- There are seasonal revenues and this is a month where revenues are lower.
- There are non-operating expenses in overhead (ie sold an asset, got a refund for work that was performed in previous fiscal years, etc.) and the company didn’t put that income in other income which is listed after net operating profit.
- Costs from suppliers have increased and the company hasn’t increased its prices to customers
- The company is producing products/services at lower profit
- The company has more unbillable time
- Overhead cost per hour is increasing
- The company hasn’t properly accounted for billable (revenue producing) hours
- The company has more costs in your cost of goods sold than revenues for those costs
If net profit per unit is inconsistent:
- The company has financial statement fruit salad
- The company is in a seasonal business
- Any of the possibilities listed above
What is your company’s net profit per unit of revenue?
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Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
