Knowing the profitability rate of your different projects is important so you can measure and see which projects are doing well. But the key is to make sure you're measuring the right numbers so that you can compare apples to apples, instead of apples to oranges. That’s why, in this post, we’re going to talk about how to find your firm’s Operating Profit Percentage.
The Two Kinds of Revenues
When it comes to revenues, you could be looking at two different numbers - your Total Revenue Numbers and your Net Revenue Numbers.
Your Total Revenue Numbers deal with money that's coming in and that’s headed to the bank. Typically, your design fees are going to make up the majority of this. And there may be a little bit of money coming in because of reimbursable expenses.
A chunk of your Total Revenue may also be earmarked for your consultants. This number can go up to 40% of your Total Revenue or much higher depending on the project.
The second number you could be looking at is your Net Revenue. This is the money you get to keep to run your Firm. You get this when you take your total revenue and then you subtract out the consultants and the direct expenses. And that's what we want to measure against.
Income Statement Examples
Let's take a look at some income statements.
Column A is an Architecture firm and column E is an Engineering Firm.Now, in this one, we're going to assume that we have an architecture firm and an engineering firm.
Column A
Let's look at this first set of numbers. We got a million dollars of revenue. We subtract out consultants and expenses, and you end up with net revenue of $595,000.
We go down through all the numbers, get our gross profits, but at the bottom, we've got an operating profit of $152,000 on a million dollars of revenue.
Column E
Look at the engineering firm, $608,000 of revenue, but less consultant and direct expenses, but it still has a net revenue of $595,000 and the same operating profit of $152,000.
Which is Doing Better?
When you’re doing this comparison, you can see that we've got a 15.2% net profit for the architecture firm and a 25% net profit for the engineering firm. And it looks like the engineering firm is doing better.
But when we normalize these from the Net Revenue standpoint, we see that both of these are performing identically at 25.5% operating profit. Now we’re comparing apples to apples, instead of apples to oranges.
If you want to know which projects do better than does better than the others, you always want to calculate your operating profit percentage based on your Net Revenue.
How To Calculate For Your Operating Profit Rate
It's a simple calculation, but it's very effective. Take your Operating Profit, divide it by your Net Revenue, and that will give you your Operating Profit Rate.
Don’t Aim for Average
Top firms are running at 20% or higher.
There are some firms that go a lot higher than 20%. On average, firms are down in the lower teens. You don’t want to be on average.
What is average? Average is the worst of the best and the best of the worst, so don’t aim to be average. Let's shoot to be in that top tier. Worse, fFirms that are not performing well are down in single-digit operating profits as a percentage and that's no place to be.
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