Gross profit isn’t a percentage, it’s a dollar

Ask most business owners how they’re tracking and you’ll hear a percentage. “Our margin’s sitting around 40%.” “We’re up two percent on last year.” Percentages are easy to say and easy to compare. The trouble is, you don’t bank a percentage. You bank dollars.

That distinction matters more than it sounds. A 45% margin on a small job and a 35% margin on a big one can look worse on paper and still put more cash in the account. If you’re only watching the percentage, you can end up steering the business toward the wrong jobs, the wrong products, and the wrong customers, all while your gross margin percentage looks perfectly healthy.

Start with the absolute dollars. Percentages are a guide, a quick way to sense-check whether pricing is in the right ballpark. But the number that actually pays the overheads, the wages, and you, is the dollar figure sitting below revenue. Two businesses can post the same margin percentage and be in completely different financial positions depending on how many dollars that percentage is generating.

Next, look at whether your overheads are the right size for the gross margin, or revenue, you’re actually producing. It’s a simple question that’s easy to lose sight of when things are busy. Overheads tend to creep up quietly, a new subscription here, an extra hand there, while nobody checks whether gross margin dollars have grown to match. If overheads are set for a bigger business than the one you currently have, growth in revenue alone won’t fix it. The gross margin has to grow with it.

Which products or services are actually profitable once you account for the time they take? This is where margin per hour becomes the sharper lens than margin per dollar or margin per cent.

Here’s a practical example. Say you sell a product with a modest margin percentage, but it only takes an hour to install. Compare that to a product with a much better margin percentage that takes a full day on the tools. On paper, the second product looks like the better sale. But when labour is tight, and for most of our clients right now, it is, the first product might actually be the better outcome. You’re generating solid margin dollars per hour of labour, without tying up a scarce resource for a full day to do it.

That’s the real question worth asking of every product or job type you sell: not just what margin does this deliver, but what margin does it deliver per hour of the team’s time? In a labour-constrained market, that number often tells a very different story to the one on your standard margin report, and it’s usually the one worth acting on first.

If you haven’t looked at margin per hour across your product or service range before, it’s worth the exercise. We’re always happy to help you dig into it.