Contrary to popular industry belief, a 40% gross profit margin may not be the magical number that leads to the best bottom line in the kitchen and bath business. The correct number for a particular business may be significantly higher or lower. It really turns on three things: (1) a “market-rate” owner’s salary, (2) the operation’s overhead including a “market rate” rent, and (3) the owner’s desired annual return on his investment.
The first reason why a bigger top revenue line only marginally affects one’s bottom line is that more errors are made with higher sales volumes; so gross margins typically decline by a few percentage points. Secondly, variable expenses - like sales commissions and payroll taxes - increase with higher sales volumes. And third, more staff people are usually needed to support the higher sales volumes, adding to the overhead.
By Ken Peterson, CKD and Leah Peterson, SEN Design Group
For nearly 20 years, our Founder and President, Ken Peterson, CKD, has had a sought-after business management column in Kitchen and Bath Design News Magazine. Ken, who continues to be active in the company, now oversees education for SEN, and his daughter, Leah, began running daily operations three years ago as Executive Vice President.