The Magic Number When Calculating Your GPM

42%

If you ever watched Schoolhouse Rock or listened to Three Dog Night and they all sang along, “3 is the magic number”. Well, sorry to tell you, they did not know how to run a profitable IT Business.

42% Period. If that’s not the number you see when calculating your business’ Gross Profit Margin, then you have some serious work to do on your business.

Just because your business isn’t in the red doesn’t mean that you’re properly maximizing your business to the fullest. There are many factors that make it essential to clear the 42% gross profit mark.

What’s most important in connecting your business goals to the maximization of your resources is knowing that it’s not just about your net profit, but rather the future growth of your business.

By reaching this magic number, you are better able to expand your business by providing the proper amount of resources to each of your divisions. This should start with your service department, as you need to be meticulous with your margins so you squeeze every drop out of your services.

While evaluating your services’ margins, it is important to get a grip on what kind of income system you’re using, such as project, hourly, or recurring revenue. Each of these systems of incomes have unique advantages and disadvantages (read more here) so starting there gives you the opportunity to check if your team is running at the highest level.

When evaluating your revenue systems, there’s another golden number to keep in mind: 33%. This 33% should be the % of Service Salaries to Service Revenue. When using your service systems to make sure that you’re getting the greatest return on your hours spent on your clients. Too sparse a margin means you’re working too hard, while too wide a margin means there’s probably opportunities to expand your team’s efforts in service.

We know reaching these profit sweet spots can be a delicate balancing act. However, if you hit these magic marks, your business will be pushing ahead to its highest potential.