![]() COGs are as low as 10% which means a 90% gross profit. Once you build the software in a SaaS model, the basic business model is very different. You’re inventing something new so it’s important to be rewarded as a business if it succeeds. Net operating income is between 25-30% Why is it so high? Software sales are risky. However, you have to put a lot of time and effort into keep your business going, so your SG&A is between 40-50% with as much as 25% of that being in sales expenses. If you are building the software, your COGs are going to be around 25% because you have a lot of people putting in the work to build this software. In the software industry, there are two different types depending on if you make the software and sell it to people or a Software as a Service (SaaS) model where you make the software and are in effect, leasing it out to people over time because they are paying a monthly fee or are on an annual contract. Chances are though, your work is going to be more cyclical, so you want to make a bigger profit to account for those instances. This means you could make as high as 20% net operating income as a specialty contractor. SG&A is probably around 10% like general contractors. COGs are around 70% leaving you with 30% gross profit. What about specialty construction? Specialty contractors use unique skills. This leaves 7-8% in net operating income. Since they go out and bid on jobs, their SG&A is usually around 7-8%. General contractors are usually subbing out the work and are more like project managers for the overall project. There is construction that is specialty and construction that is general. There are a couple of types of construction. Make sure to put your numbers in to see where you stand so the basic business model can keep you on track. Since you don’t have many sales expenses because you are making a commodity-type product, your SG&A is low around 15%.Įven if you are in specialty manufacturing or generic manufacturing, you can still get to the same bottom-line profits. If you are doing generic manufacturing, COGs are usually around 70%, even up to 75% which leaves you with 30% gross profit. SG&A in this space are usually higher at around 35% which leaves you with a 15% net operating income. Your gross profit should be at or above the 50% level because you’re managing something that’s unique that probably took some advanced knowledge, machine, etc. When you’re doing specialty manufacturing, Your COGs are going to be around 50%, even as high as 60%. Depending on which one you are doing, it could have a big impact on your basic business model. The other is generic manufacturing where you are manufacturing widgets or anything that’s not unique. There is specialty manufacturing for producing highly unique and one-off products. There are a couple of types of manufacturing we’re going to cover. ![]() ![]() The next step is to line your business up with this formula to see where you stand. This results in a 15-20% net operating income. Your 100% revenue minus COGs results in 50% gross profit. There are many different types of professional services businesses, so this example is representative of most, but not all of them.ĬOGS in a service-based business are your people that are providing the service to your customers and that is around 50%. For example, below is a comparison of the ideal way a sample business should be running versus how the business is actually performing.īasic Business Model By Your Industry Professional Services The basic business model is a static equation, but the inputs change by industry, making this simplistic model extraordinarily powerful. ![]() Net Operating Income: All revenue minus all of the operating expenses For example, rent, utilities, marketing expenses, etc. Sales, General and Administrative Expenses (SG&A): The costs of running your business. Gross Profit: The profit you make after deducting COGs from revenue It can be broken down into the following five parts Revenue, Cost of Goods Sold (COGS), Gross Profit, Sales, General and Administrative Expenses (SG&A) and Net Operating Income.Ĭost of Goods Sold (COGs): The cost of goods you are selling It’s a summarized look at how your business is performing. Simplifying and comparing to a Basic Business Model provides the benefit of benchmarking any business against the expected industry business performance at any given time. While every business has some unique characteristics, businesses within industries share many more similarities than differences with respect to how they make money and what range of profitability can be expected. Accounting is complicated enough! One area where simplification helps tremendously is benchmarking. At TGG, we believe in simplifying things whenever possible, especially when it comes to developing a basic business model. ![]()
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