Business Coaching for contractors is a fun job…..I get to train business owners about things like profit and loss, WIP accounting, and COGS. Does that all sound like a foreign language? You’ve got to start somewhere, so let’s start with the basics of profit. What is profit and what should your profits be used for?
Profit is the money left over after all the bills have been paid, but as a business owner, it is NOT the money you have earned. It is the money the business has earned, and the business needs this money.
Looking at this closer, you work for the company and get paid a salary just like everyone else, that number for a builder should be in the 7-10% range, an expense to the company recorded on your P&L statement. This way, just like rent, insurance, and marketing an expense to the company – so is your salary.
The remaining balance is your profit.
The first instinct is to say, well that is my money too, I earned it. There is danger in thinking that way.
NO, the company earned it and it needs it. If you treat profit as salary, you are robbing the company of the necessary lifeblood it needs to grow and survive. You get paid a salary to pay your bills, feed your family and take vacations, to live on.
The company’s profit is the money it needs to live on to grow, provide raises, pay bonuses and give back to the community. Without growth there are no promotions, and your current or future employees have no opportunities, nothing to strive for, it is a dead-end job, and they will stagnate or leave for opportunities your company cannot provide.
The business is a living entity in itself, and profit is the fuel for growth, if it is coasting – it is going downhill “which is the only way to coast”. To go uphill the business needs fuel and energy, profit in excess of your earnings.
In the beginning, this will be tough, the bottom line is your company may be losing money on the books, but facts are facts and to look at it differently is to lie to yourself about how much you and your company are earning.
For a typical builder the numbers look like this:
Operating expenses will run about 16-18% of sales which includes 7-10% for owner compensation, as the company grows this line will also include salaries of other management roles, CFO, COO, etc. But the ability to expand and hire these roles, when needed comes from company profit, you need your money to live on, and you should not take a pay cut to bring on new hires and provide the necessary benefits to attract qualified personnel.
Increased sales and the resulting profit will provide the ongoing capital. For the typical builder, this is even more critical as outside capital is difficult if not impossible to obtain due to the nature of the business.
So, operating expenses are a fixed number and to obtain a 10% company profit you will NEED 26% of sales to make that happen. This is the minimum to survive. 26% is not some crazy goal to reach someday, some pie-in-the-sky number is your bare minimum.
Let’s not forget the math, that is 26% of SALES and to obtain that number the cost of the work must be marked up by 35% to obtain the necessary price. Quick math Cost of work = $100 X 1.35 = $135 price and $35 of overhead and profit. OH&P divided by sales is the percentage of earnings based on sales; $35/$135=26%.
My experience in business coaching for contractors tells me this is the bare minimum necessary. I say minimum because that is the perfect world. This would mean your estimate was perfect, there were no surprises, no unexpected material cost increases, no weather issues, and no issues with client pay. Perfect!
But…..that is not construction, it is an ESTIMATE. The only thing guaranteeing the value of that estimate is you. Anything goes wrong and you eat it.
We have all heard it, you need a 10% contingency to guarantee a profit, that 10% can be calculated in the cost of the work or added to the markup but it needs to be somewhere. If it is in the markup to cost you are now at a 45%, mark up on cost.
At first glance, this may look impossible, but I’ve been offering business coaching for contractors for years and these are the facts, not a dream or a goal just the basic facts needed to survive and grow without calculating the tax bill. The sofa you just bought had at least a 100% mark-up on cost and that Caesar salad you had for lunch did not cost $7.00 but that was the price.
If we were all aware of the mark-up on the goods we purchased, we would probably think twice but we accept it because that is what things cost including the cost of doing business. These are your costs of doing business and you need to be aware of them and included them in your price or just like most small businesses you will be out of business within 5 years. Without the contingency, the cost will come out of profit, and with no profit, you are coasting, and coasting is going downhill.
A business provides jobs, benefits, and opportunities for your employees to expand their potential. The business can give back to the community, and provide training, customer service, and warranty. Without profit none of these is possible. These are your costs, like it or not but you need to understand it and factor it into all of your estimates.
If you are in need of working with a business coach who specializes in construction – give me a call today at 203-826-8096