How Much Profit Should A Trade Business Make? (2024)

Ever wondered how much profit you should be making?

Well, you’re not alone!

I get asked this question all the time by trade business owners.

Even if they’re doing well…

They still want to know what’s possible, and where they should be.

Because who wants to leave $$$$ on the table?

So, let’s break this down…

In your business, there are 3 types of profit.

Gross Profit…

Operating Profit…

… and Net Profit.

The one that matters most is Operating Profit.

This is what’s left over after every cost in your business has been accounted for.

(Like labour and materials, and overhead costs like rent and accounting)

So…how much operating profit should you be making?

Well, this is less about how much you WANT to make…

And more about how much you NEED to make…

You NEED operating profit:

(1) to make great money on top of your salary, and

(2) to create MORE CASH

You can get away with okay people… okay strategy… and even okay execution…

But run out of cash and it's game over.

So in simple terms…

No operating profit = no extra cash

But in my experience most trade businesses don’t make enough!

Let me explain…

Data shows that the avg. operating profit margin for our industry is under 5%.

But a recent report by Xero found that on average…

5 to 15% of revenue goes uncollected every single year.

5 to 15%!!!

With a 5% avg. operating profit margin…

And 5% of revenue going uncollected…

You’re making no money!

So, how much profit should you be making?

Well, we use the following guideline with our clients:

• 5% or less in operating profit means your business is likely onlife support,
• 10% in operating profit means you likely have anokaybusiness,
• 15% in operating profit means you likely have agoodbusiness, and
• 20% or more in operating profit means you likely have agreatbusiness.

So, if you’re turning $2,000,000 in revenue…

Ideally,you’d want to make $400,000+ in operating profit.

And at a minimum, $200,000…

Any less than $200,000 and you’ll be entering the danger zone.

But remember, these percentages are based on you not collecting just 5% of revenue.

If you aren’t collecting upwards of 15% of revenue…

Then your targets are going to look VERY different!

Even at $400,000 in operating profit, your business would be on life support…

So, keep your receivables as low as possible and get cash in the door ASAP.

The sooner you get cash in the door, the lower your TRUE breakeven point becomes…

And the more money you’ll make!

We’d love to help transform your business.

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P.S. Setting an operating profit target is one thing…

Making sure you’re hitting it is another.

That’s why we track our client’s performance monthly using the report below…

Because as Peter Drucker famously said…

“You can’t manage what you don’t measure”