Did you know that the average net profit for contractors is between 1.4 and 3.5 percent before tax (www.cfma.org)? Does this sound like a good profit margin for your business? In construction, profit margins are often thought about far too late in the process.
That is obviously not enough to build a good business and provide a decent living for the construction business owner. The good news is that you can increase your profit margins, and I help my clients do this on a regular basis.
The reality is that most business owners (of all kinds, not just in the construction industry) are so focused on increasing sales because they believe that is the number that equals success and sometimes even mistake this for being profitable.
However, they are missing ( or have forgotten) the point of what having a successful business actually means (and why they went into business in the first place) – and that is to make a good profit on the work you are doing after paying yourself a nice paycheck that allows you to reinvest in the business, have a strong cash flow, and provides you the ability to live the life you want to live.
A truly successful business is one where the business owner is bottom line focused (Net Profitability) and not gross sales focused (Revenue).
Many of the contractors that come to me for help feel like they are stuck living project to project, they are working like crazy, have no life and are still not putting enough money in their pocket. Is this you? Then keep reading.
Some contractors come to me feeling like they are doing pretty well, but feel like they could be doing better and want to grow to the next level. Is this you? Then keep reading because this will help you as well.
So, let’s just get down to business, shall we? Just how do you increase the profit margin for your business?
In order to increase your profit margin, we must first have a look at the true cost of running your business.
Only about 20% Of Construction Business Owners Know The True Cost Of Running Their Business
When you don’t know how to monitor your numbers, it’s difficult to determine if your business is profitable.
But knowing the numbers and true cost of doing business is crucial for increasing profits because it enables you to assess your company’s financial stability and overall financial health.
Companies That Take Time To Identify, Measure, and Track Decisions Based On Financial, Operational, and Historical Data Are More Likely To Increase Their Success and their Profit Margins.
The more knowledge you have of your company, the more information you will be armed with when making decisions about it.
Identifying your true cost is only step one in an ongoing effort to improve your bottom line. Tracking costs against revenue will enable you to review past performance and plan for future results, but first, you must collect the actual figures that describe your business performance.
The more accurate these figures, the more accurate your profit margin will be. Keep in mind that your goal is to increase profit, not just sales.
The more time and effort you put into this process, the easier it will be to determine if your construction business is profitable or incurring a loss on each job.
Do you know what your gross profit margin is? Or net profit margin? How much your overhead is? What the true cost of that job is that you just completed? Before you even start construction, profit margins should be measured for each job.
I’m not asking these questions rhetorically. I really want to know how much you know about what is driving the profitability of your company, and it appears that many construction business owners do not have a clue. And if they don’t know and follow those metrics closely then that is problematic.
You can have all the skills and knowledge in the world — be an expert at managing people, designing projects, schmoozing clients — but if you don’t know what your costs are based on, how will you ever determine, based on data, whether or not you’re making money?
If you do not know the real numbers or total cost to fully support your business and are not calculating them on a monthly basis then you are flying by the seat of your pants when it comes to budgeting for projects or managing cash flow. When it comes to any business in construction, profit margins matter so make sure to keep an eye on them.
Knowing The Most Important Financial Numbers Can Make or Break Your Business
It seems so easy just to let somebody else deal with all those dreary financial details, but if you want to be profitable, you’ll need to get involved early and get familiar with the numbers. You can’t just guess what each job makes, know your construction profit margin in each phase of your projects and make sure they are on track to hit your targets.
What your gross profit is, for example, is a most important number to know.
Without accurate numbers to make intelligent decisions based on data and not wishful thinking, even the best business owner will be at a disadvantage.
Construction Profit Margins – Gross Profit and Net Profit
Gross Profit:
Your gross profit (GP) is the difference between how much revenue was made and how much it cost to produce that revenue.
Gross Profit = Total Revenue – Cost Of Goods Sold
For example, if you price a job at $50,000 and your direct job costs are $40,000, your gross profit would be $10,000.
That would equate to 80% cost of sales and a 20% gross profit.
Your GP is useful for evaluating your pricing strategies because it can reveal whether or not your prices are too high, too low, or just right compared to the cost of producing the product/service.
If your GP is low – such as the 20% example above, it’s possible that you need to increase your prices for your future projects or you may need to examine your direct costs and see if they were in line with your original cost estimate.
Net Profit:
The net profit (NP) refers to the business’s total revenue after subtracting all interest, payroll taxes, rent, utilities etc.- Operating Expenses. It can also be referred to as net income or net loss.
Net profit = Gross Profit – Total Expenses
For example, if your gross profit for the month is $50,000 ( gross revenue – cost of goods) and your overhead expenses ( administrative, rent, marketing etc) was $60,000, you had a net loss of ($10,000).
Your net tells you whether you have incurred a loss or gained a profit, your gross profit tells you how much cost of sales is affecting the sales revenue.
Here are some key takeaways:
- The gross profit margin is the percentage of revenue that exceeds the cost of goods sold
- A high gross profit margin indicates that a company is successfully producing profit over and above its direct costs
- The net profit reflects how much each dollar of revenue becomes profit.
Understanding gross profit and net profit is key to determining where the financial health of your business stands.
Then you will be able to take immediate action if these numbers are going in the wrong direction and implement changes that will ensure your financial goals are met.
If you are interested in increasing the profitability of your contracting business, I would love to talk with you.
Having had my own successful construction businesses for over 20 years, I have walked in your shoes and know exactly what you face in your business daily.
Add to that my accounting and marketing background and it makes me uniquely qualified to work with you to develop and implement strategies that will increase your revenue and profitability and create a business that actually works FOR you.
To learn more about how I can help you visit my page at https://susangiddings.com/home/who-we-work-with/construction/
