Tradie Profit Secrets: Gross Profit vs Net Profit

Andy
Yeah, it can be a bit of a shitshow sometimes. But what if I told you there’s a way to nail it down to finally take a breather and actually enjoy your business again?

Ange
Well, that’s where Andy here can lend a hand. With years in the trenches and plenty of battle scars to show, he’s got the know-how to turn your chaos into smooth sailing. 

Andy
Hell yeah! Let’s have a talk. I’m setting aside some time for you legends about getting your trade business in ship shape. We’re talking real solutions and no fluff.

Ange
Spot on, Andy. Just a relaxed, no pressure chat, like having a cold one with a mate who’s got your back. 

Andy
Let’s get you out of your business blues and book in a free strategy call with me. Visit lifestyletradie.com.au to book your slot today. Let’s get you back into the driver’s seat. 

Are you busting your guts on the job, seeing high dollars in quotes and contracts, but peanuts in the bank? Have you ever wondered where all the bloody money goes? 

Ange
Don’t worry, because in today’s episode, we’re diving deep into the nitty gritty of trade business finance. We’re actually busting myths, we’re shedding light on where your money’s going, and we’ll be sharing the vital difference between net profit and gross profit. A topic we reckon doesn’t get the attention it deserves. Hey, Andy? 

Andy
Hell yeah. There’s no doubt about it Ange, people need to focus on this more because too many tradies are just focused on turnover and how many trucks they have on the road and maybe how many people they have in their team. And you know what? I have to admit I was totally guilty of this back in the day. 

Ange
Well, that’s all vanity metrics and it doesn’t tell you anything about how much profit you’re making. Now, maybe you’re saying, hang on a minute, Ange. That’s a bit rough, I know my actual profits, but you know what? I’m actually going to challenge you on that today because it’s not enough to just look at your net profit at the end of the year. With your accountant, you actually need to look at gross profit too and more frequently. In fact, I’m actually going to share the true gross profit formula with you today. 

Andy
Ooh, I’m certainly intrigued. 

Ange
Well, the thing is, most tradies we speak with skim over gross profit and to be honest, don’t actually understand it properly. And because of that, they don’t understand the importance nor the difference between net profit and gross profit. 

Andy
Or they have their profit and loss statements set up incorrectly for their trade business. And the problem with that means you can’t see how you’re tracking in business because your reports are all wrong.

Ange
And you know what? That’s where things can get messy in your business very quickly.

Andy
So today you’re going to learn from our mistakes and thankfully you’ll also learn from our successors too. So let’s get stuck in. You’re listening to The Tradie Show. This is the podcast for trade business and contracting bosses like you, who want to lead with confidence, make more profit and create a better lifestyle.

Ange
We’re your hosts, Andy and Angela Smith, husband and wife team and co-founders of Lifestyle Tradie. Are you ready to have some fun? 

Andy
Hell yeah! 

Ange
So, before we get into this topic, I do want to preface it with the fact that we are not accountants or financial advisors. 

Andy
Yeah, we are business owners and this information is for educational purposes only and based off our own years of experience in the trade industry. With any financial decisions, please make sure you speak to a professional.

Ange
So, when we’re working with tradies, the story tends to go like this. You work really hard every single day and at the end of a financial year comes around and you think to yourself, hmm, I better go see my accountant and close off my financial year. Your accountant shares your profit and loss statement and your balance sheet and the fact that you’ve either perhaps made a bit of profit, you’ve broken even, or maybe you’ve actually gone backwards. They simply ask you to sign the paperwork to say, yes, that’s all correct for the ATO and you literally walk away. 

Andy
And your response is generally, Oh my God, I’ve worked my ass off for the whole year for that result? And for what? I’m exhausted!  I’ve been so dedicated to this business and I can see absolutely nothing for it. Right, guys? Is that what we say? 

Ange
Yes, unfortunately. It’s such a typical story and it honestly breaks my heart. If you want to change that story, then you must take ownership of the finance inside your business. Crew, I’m not expecting you to go into Xero and run reports yourself, but you should have some understanding and today we’re going to share with you exactly how.

Andy
And just to make that point really clear, Ange, I want to say that understanding this is an absolute game changer. And when you get this right and you understand it from the ground up, you’ll be able to scale your business because the opposite of that is just scaling chaos. And we’ve been there before and let me tell you, it’s so stressful.

Ange
Yeah, it is stressful. Now, let me get back to this story. So let’s continue because so many tradies we know have been through this exact situation. So let me put you back there. Imagine this. Your accountant has just told you you’ve made a little bit of profit, you’ve broken even, or you’ve gone backwards. What do you think the tradie does then? Like, what happens next? 

Andy
Other than freaking out, they think they need to cut costs, right? Because that’s how they increase their profit. And they think this will give them the money back in their back pockets. 

Ange
Right. So, the accountant has talked about how to improve net profit, the bottom of a profit loss statement. And the first thing every tradie does with their accountant is to look at their operating expenses and work out what they can cut from their business. 

Andy
And there’s no doubt about it, I did exactly this. And although it is important to review your operating expenses and squeeze what you can, the reality is it’s not a long term solution to making more profit.

Ange
Exactly. Because growth of any business comes with investment of operating expenses. Think sales and marketing, the running costs of your vehicles, even your office staff. These are all operating expenses that you simply can’t nor want to avoid when you’re actually trying to scale. It would be detrimental to your growth if you did chop them out, but it’s the first thing that tradies look to trim.

Andy
And your accountant is often on board telling you what you need to take out of your operating expenses so you can make more net profit. But guess what? It’s really only half the picture. They need to tell the whole story. 

Ange
Exactly. What’s with that? What they should be educating is to look at gross profit and how they can influence this. And this bit is at the top of a profit and loss statement. 

Andy
Yeah, I agree, Ange. I mean, I really don’t remember. I mean, back when we first started Dr. Drip ever talking about gross profit with our accountant then and how to influence the numbers, you know, either I was mentally absent. Um, at those meetings or I simply, we just didn’t talk about it.

Ange
Well, to be honest, we just didn’t know what we didn’t know. When you care little for finance, it’s actually all too easy to switch off and actually not hear what someone in the know has to share. 

Andy
You say “didn’t care”. I was all about the growth, baby.  

Ange
It’s not that you didn’t care. It was that it was just not something you got taught at TAFE. So I guess it was just all new in general. And what we know now is that it’s what makes the difference to every trade business if they really want to make good profit in their business. 

Andy
Agree. 

Ange
They actually have to start at the top of a P&L. They need to be talking about gross profit and that’s where we need to spend our time.

Andy
Okay. So just to make sure all of us are following along because this is super important. Can we just explain a basic profit and loss statement so we all get it? And then we can talk about gross profit specifically and why influencing this makes a big difference. 

Ange
Okay. So I’m going to make this really simple. Plus I know lots of people are visual. So I’ve also created a downloadable cheat sheet that goes along with this episode. 

Andy
Awesome. 

Ange
Okay. So let’s talk profit and loss statements. And I’m going to explain this like I’m pretending you know nothing. Okay. So the topic of a profit and loss statement shows the money that comes into the business. Most people call these sales, revenue, or turnover. And all those words mean exactly the same thing. Under that, you have the cost of goods sold, which includes the expenses you had that related specifically to doing the jobs. 

Andy
Things like materials, equipment you may have hired, skip bins, and your tradies time or labor for example.

Ange
Yes. So to find out your gross profit, you minus your total cost of goods sold from your total revenue. That’s now the money you made from the jobs after you’ve paid for all your expenses relating directly to the work. 

Andy
But it’s not over yet though. You have to pay for your operating expenses as well. This is all that stuff like bank fees, bookkeeping, marketing expenses, anything to do with your vehicle fleet costs as well. It’s all in that section. 

Ange
Exactly. So I take my gross profit minus my operating expenses and this equals my net profit or perhaps your loss. 

Andy
Yeah, and I think that’s pretty straightforward. So can you share with us some of the main issues we see? 

Ange
Okay, well, it’s important that you understand how your P&L or profit and loss statement is made up for your business. And one of the main problems I see with trade business owners is the fact that their P&L is actually not built right. 

Andy
And maybe that’s because you set up your Xero account yourself and you used a basic template which needed changes to suit your trade business.

Ange
True. And maybe your bookkeeper or accountant hasn’t changed this for you over the course of time for whatever reason.

Andy
So on that note, this conversation should be the trigger to ask your bookkeeper or accountant exactly that question. Is your P&L set up right for a trade business? 

Ange
Yeah, that’d be a really intelligent thing to do because right now I’m changing pretty much every profit and loss statement that crosses my desk with new members of Lifestyle Tradie one way or another just to make sure it’s built right. Because if you don’t have it built right, then we actually can’t analyze what it’s telling us. 

Andy
Which means you don’t know your true numbers because the report is wrong. 

Ange
Exactly. And that’s a big problem and it needs to be fixed ASAP.  I’ve seen P&Ls where the materials are even in operating expenses, but the most common is the tradespeople wages aren’t in cost of goods sold, like at the top of a P&L, and it should be. You can’t do the job without having someone physically doing the labor. 

Andy
Yeah. Cost of goods sold must include everything to do with completing that job. You know, pretty much the things you’ve included in your quote are now split out here.

Ange
That’s really an important point and I want to circle back to that in a sec. But before I do, I just want to say one thing about the tradespeople wages, because some of you might be sitting there and arguing, hang on a minute, Ange, that’s a full time team member. You have to pay for them whether you’ve got work or not, like their salary. And that’s why they’re operating expenses. My response to you would be, you know what? That’s true. You do have to pay for them regardless of the work you’ve got. It’s definitely true with your office staff because their wages are reflected in operating expenses, not in cost of goods sold because they don’t do actual billable time out on the tools, right? But your tradespeople, their superannuation, their wages must sit under the cost of goods sold because you cannot have done that job without them actually out in the field. 

Andy
So what we’re talking about is billable time, okay? So let’s make sure it’s done the right way, have a chat with your accountant to make sure it’s in the right spot. It’s going to have a huge impact on how you read your reporting. So now we want to get to gross profit and net profit. Can you give us a real example of what this might look like with numbers over a month or so, Ange? 

Ange
Okay, so let’s say you’re looking at the month of October and in that month you made 100, 000$ in revenue. That said, you had 60, 000$ allocated to the cost of goods sold. Think tradesman’s wages, your equipment hire, the materials purchases you made for that month. This leaves you with 40, 000$ of gross profit. You still with me? 

Andy
Yeah, I’m following. So it’s 100, 000$ of revenue minus 60, 000$ in costs, which leaves you 40, 000$ in gross profit.

Ange
Right. So from that 40, 000, you now have to pay for your operating expenses to keep the business running. And let’s say 30, 000$. So, what’s left? 

Andy
10, 000$. 

Ange
Exactly. You can do your math. 

Andy
Mate, how good am I? I’m right on the money today. Sharp as a tack. 

Ange
So, let’s recap that. Your revenue was 100,000$. Cost of goods sold was 60, 000$, meaning you’re left with a gross profit of 40,000$. Your operating costs are 30,000$, so your net profit is 10 grand for the month. We good? 

Andy
Yeah. Yeah. We’re good. It seems pretty straightforward enough for me. But what’s the problem with this? 

Ange
Well, if the P&L was right with regards to building the chart of accounts, at least we know we’re looking at the right numbers and that’s a great start. But let me ask you this. How do you know if this business is doing well? Is 10 percent a good net profit margin? 

Andy
Yeah, 10 percent is okay, but it’s not really fabulous to be honest. I mean, I know a lot of the people we’re working with are up to 25 and, and a lot of them are plus as well, but you’ve got to weigh up how hard you’re working in your business. Like is 10 percent really worth it for the effort? But you know what? At least you’re not going backwards. 

Ange
Yes, but just as a reminder, we’re talking about the month of October. It’s literally one full month. So let me ask you this, Andy, how many jobs would that have been for us in the maintenance game? 

Andy
Oh, how big’s a piece of string? It really depends on the size of the team and how big the jobs are. But say you’ve got a team of five tradies. You could be doing anything up to 80, 100 jobs a week. Let’s say, you know, three to 400 a month, just as a bit of a guess. 

Ange
That’s a lot of jobs. 

Andy
Yeah, it is. It just depends on if you’re doing a lot of little jobs or if you’ve got some big jobs in the pipeline. So without having reviewed the jobs individually at the end, it is really difficult to say whether or not we’ve made a profit. We said we would, you know, if I had a guess, that’s where these 80/20 rules would come in. And, you know, we talk about this regularly where 20 percent of your jobs are probably the most lucrative and 80 percent of them were just pretty average, to be honest.

Ange
Exactly. And you still don’t really know the answer because you’re looking at a profit and loss statement that’s actually too far gone. It’s what we call a lag metric. It’s happened way down the track and too late to have made any corrections in the business. So where to now? 

Andy
So there are a few things we can do to get a better grip on these numbers, but the best way to start is to reverse engineer this process and take it down to a job level.

Ange
Exactly. I’m still asking the same question though when we’re dealing with one job. Did you make a profit? And you probably go, yeah, I built six grand profit into that job. Then my question is the same. Do you know if you actually made six grand? 

Andy
Well, the reality is half the time you don’t know. And most tradies don’t know because they haven’t been monitoring it along the way or done some back costing the check. Cause we all know some jobs, they just blowout, materials cost rise, we have bad weather, it’s hot, it’s cold, it’s windy, whatever it is, but we’re usually in such a hurry to race to the next job that we very rarely stop and reflect on what actually just happened, especially with the big jobs. The problem with this is we keep quoting the same way until we look at our figures six months a year down the track and say, I’ve made no money. 

Ange
And this is where we trade business owners are losing money on each individual job, but we don’t ever stop to take a look at why enter gross profit. We need to look at the top of a P&L and what things we can change there. And if we do this right, we will ultimately have more profit in our back pocket. So, let’s look at the gross profit formula.

Andy
Woohoo! Break it down for us, Ange. 

Ange
So, as we’ve mentioned earlier, you’ve got your revenue at the top, minus your cost of goods sold, leaving you with gross profit. Then you pay operating expenses to be left with net profit. So Andy, give me an example using this theory when you’re talking about one job. 

Andy
So if this was just one job and your revenue was say 10 grand, but then you still got to have your labor materials, et cetera. And let’s just say that’s eight grand. You’d be left with two grand as growth profit, right? And with those two grand, we still have to pay for some operating expenses as well. So why don’t we just say that is a thousand dollars. So when you work it all out, that would be a thousand dollars of net profit, right?

Ange
That’s right. And if you didn’t know any better, you might say, Oh, that’s okay, but I actually disagree. 

Andy
What do you mean by that? Please explain. 

Ange
Well, picture this. If I put your cost of goods sold, let’s call them COGS and your gross profit in two circles next to each other, then which one is bigger? 

Andy
Well, the COGS was eight grand and the gross profit was two grand. So the COGS is definitely bigger. 

Ange
Exactly. And my response to that is we should be doing better. You should actually be aiming to even these circles out because if you want to influence making better gross profit on one single job, then the aim is to make your gross profit larger than the cost of goods sold.

Andy
Okay. So how do we do that and how do we make This smaller portion, a bigger portion? 

Ange
Well, have you got another few hours? 

Andy
Oh,  maybe. 

Ange
Well, in all seriousness, we ultimately need to increase revenue. We need to decrease time or labor. Yes. And we need to squeeze materials and there’s lots of ways that we can influence each one of these. We need to actually learn how to do this on one single job aiming for excellence so that when you roll it out to multiple jobs in a day or in a week or in a month, then you’re actually scaling profitably and not scaling chaos. 

Andy
Yep. You got me. I love that stuff. And that makes so much sense. You know, talking business, dreaming business, I love talking about numbers when it works in our favor. 

Ange
Yep. Amazing what you learn when you’re forced to actually fix your own mess. Right? 

Andy
Agreed. 

Ange
So, understanding your P&L or your profit and loss statement is one thing and having it built right in the first place is of course another, but stripping this right back to one single job to see the true profit margins is actually the deal breaker because squeezing this will result in an increase of your monthly overall gross profit margins.

Andy
And ideally will keep more in your pocket after operating expenses and that is net profit, baby. 

Ange
Love that. And to help you wrap your head around this, we’ve actually developed a download for you and it shows you the gross profit formula that I’ve been talking about. 

Andy
Plus, we’ve listed a number of ways you can increase your gross profit margins as well.

Ange
Exactly. We seriously want every trade business owner to be successful and we’re here to cheer you on. 

Andy
Don’t get overwhelmed by all these numbers and finance stuff. What’s important is that you take a vested interest in understanding what it all means. You need to know your numbers. 

Ange
I think I’ve heard that sentence a few too many times.

Andy
Yes. 

Ange
So understanding your numbers isn’t just about the numbers. It’s about the confidence they provide you to make these really quick business decisions and give you the peace of mind to know that you’re tracking in the right direction. 

Andy
So let’s make a pact today, tradies. Let’s pledge to ditch the habit of not giving a toss when it comes to finance in general and the numbers around your business and instead start giving your business the attention it deserves as a proper leader does because your future self and your bank account will definitely thank you for that.  

It’s Tradie Dilemma time and this is when you ask A&A anything segment, where you let us know what you’re having trouble with in your business and we give you our best advice.

Ange
And today we have a question from Carly in Auckland and she writes, I’ve recently had one of my old employees contact me asking for me to remove any marketing material that includes his face. What do I do about this and where do I stand? 

Andy
Oh, this is definitely an interesting one because these days everyone is very aware of their image online. So my first question back to you Carly would be, when you took that original footage, Whether that was photos, videos with any of your team, did you actually get them to sign anything or authorize any marketing material that could feature them in the future? 

Ange
Yes. So this is something that we had included way back when in our employee handbook so that they were given this at the beginning of their employment. If you do have an employee handbook, but you don’t have this component written in there, or maybe you don’t have an employee handbook at all, you can actually just give them a separate document or piece of paper for them to approve at the time. 

Andy
Yeah, this would actually give you authorization for you to use their image while they’re employed by the company and into the future as well.

Ange
Exactly. Now, If you get pushback like you are right now, assuming you haven’t got them to sign any authorised documentation, you’re going to want to ask yourself this, are they the type of person that are going to cause issues moving forward? And would they maybe put up a bad testimonial? That kind of thing. And if that’s the case, you’re probably best to remove any marketing material that features that person’s face. 

Andy
Yeah, the thing is, if they are featured a lot in your marketing and you spend a lot of time and money to build it, it could be a bit of a problem because you may be left with less usable imagery now. So that means you’re going to have to get busy to create some new stuff. 

Ange
Yes. But on the other hand, maybe you did get them to sign something and you could actually lean back on them by saying, Hey, you did actually authorize us to use your image. So we’re actually going to keep it in. Then, as you move forward, start to use other people in your images and your videos. Or, alternatively, you could actually look to use AI. 

Andy
Huh? Okay, explain to me, please, because wouldn’t that just look a bit dodgy?

Ange
Well, AI, as we know it right now, is still pretty new for marketing purposes, so people are still a little wary of creating images using a bot. However, I actually know a company who recently redid their whole website. Now, instead of spending thousands of dollars on a photo shoot, they actually created real looking photos of people wearing their shirts with logos on them for certain pages on their site. 

Andy
Yeah. That’s a bit weird. Does it look legit? 

Ange
It does. You really can’t tell that they’re not real photos. 

Andy
Well, that’s definitely interesting. And guess what, everyone, the world is changing. What did this person even use to do that, to build this new website? 

Ange
It was a program called Mid Journey. 

Andy
Interesting. So maybe we could use that to stick some hair back on my head. No, no. I’m a sexy, bald guy and I love it.  Alrighty. Enough about AI and bald heads. And I hope these tips have been helpful for you, Carly.  

Ange
Remember, we’re here to help you navigate the road of being a successful trade business owner. 

Andy
Yeah, we’ve been through the ups and downs of running a trade business, and we’ve got the secrets to help you navigate those tricky waters. 

Ange
Which is why we’re serving Andy up on a platter for you.

Andy
Say hey, what? 

Ange
Just kidding! But we do want to offer you a strategy call to help you on your business journey. 

Andy
Now, picture this, a fun, relaxed chat with me about your business, your challenges, and also your dreams. There’s no pressure, no boring pictures, just a casual conversation that could change the game for you and your business. Whether you’re stuck in the weeds or you’re just looking for a fresh perspective, I’ve got your back. 

Ange
If you’re ready to make 2024 your year and still have time for your hobbies, then head over to our website at lifestyletradie.com.au or check out the show notes for a link to schedule your call today.

Andy
I can’t wait to connect and help you rock your trade business in a way that suits your lifestyle. 

Ange
No more excuses. Let’s make 2024 your best year yet. 

Andy
Hell yeah!  

Subscribe to The Tradie Show wherever you get your favorite podcasts.  Rate and write us a review or for more information about Lifestyle Tradie, head to lifestyletradie.com.au.