Michael is the owner of a contracting company in Michigan. He called me looking for advice. He complained about his customers always asking for lower prices and there were too many cheap competitors who didn’t charge enough. Therefore his business was slowing down and hurting. He also complained: “I can’t sell enough work at my old mark-up rates to cover my overhead. So I lowered prices another 5 percent to try and attract more sales.” His lower prices still weren’t attracting enough new work or customers. “What should I do?” he asked.
I asked Michael a few simple questions: “What’s the fixed overhead cost of keeping your business open every month? What’s the break-even sales revenue you need at the markup rates you’re charging? What’s your average job size, and how many jobs do you bid versus win every month?”
He had no clue. He didn’t know his job cost or track his numbers. His wife took care of the books and he took care of the contracting business including estimating and bidding, contracts, scheduling crews, ordering materials, restocking, dealing with customers and chasing money. Odds are his wife didn’t know the answers to those questions either and neither of them ever discussed overall financial matters in any serious or regular way. So I politely said: “How can I help if you don’t have any idea what it costs to keep your business open or do the work?” He said he would call me back with the answers. Guess what? I never heard from him again. I’m sure he still isn’t making a profit.
Do You Have a Handle on Your Numbers?
To build a construction business you must be focused on your bottom-line numbers, know how much sales and markup you need, know your labor costs per unit of work, and always be sure you’re making a profit. You can’t rely on someone else or a bookkeeper to care about your finances as much as you do. You’re in business to make a profit, not to work hard for little or no return. You can have someone else pay your bills, send out the invoices, prepare financial reports, and do the accounting, but the owner must be responsible to know the numbers every day, week and month. Not just once a year, when they meet with their accountant and find they didn’t make what they had hoped to.
Why are you in business? “To make a profit.” How much profit do you make? “I don’t really know!” Could you imagine the CEO of a Fortune 500 company who doesn’t know their numbers? No! Never! When asked these important questions, many construction business owners don’t really know how much money they make. This tells me that the majority of owners don’t focus on what counts.
Busy construction business owners spend their time trying to win enough work to keep their crews busy, negotiating with subcontractors and suppliers, building projects, scheduling and supervising field workers, doing paperwork, and then hope the bottom-line numbers work out later. Often, these hardworking, dedicated, multitasking owners don’t like to be bothered with the numbers. So they pass financial matters off to an untrained construction bookkeeper or spouse to handle and manage the money, worry about making payroll and paying the bills, and getting paid. I often hear comments like: “I do the work and she takes care of the money.”
I have been a construction business owner since 1977, hired over 10,000 subcontractors, worked with hundreds of contractors as their business coach, and presented over 600 keynote speeches and workshops at construction conventions and company meetings. My experience tells me that less than 10 to 15 percent of all construction business owners actually know or track their numbers. Guess what? These few who know their numbers also make the most money in their markets.
Profit is return for business ownership, taking risk and investing capital in your business. Profit is the net amount remaining and available at the end of the year or month, to provide a dividend or distribution to the company owners, or leave in the company for next year’s growth. Net profit is the best indicator of your strategic plan, management team effectiveness, written systems, project managers, supervisors, foremen, financial tracking systems, and your company leadership.
Aim at Financial Targets!
Profit-driven owners and managers are competitive. They need targets and scoreboards to keep track and be aware of their scores at all times. You can’t win a basketball game without shooting at the basket, keeping score and knowing which team is ahead at all times. You can’t reach your business goals by trying to work as hard or as fast as possible, while not knowing how well you’re doing or your numbers. What financial, profit and job cost targets does your company aim at?
Make sure each member on your team knows exactly what their specific targets and goals are. Use precise financial targets and scorecards to keep track of results for sales, gross profit, overhead, margin, markup, net profit, return on overhead, growth, average job size, equity, working capital, return on equity, project job cost budget versus actual cost, estimated cost to complete, crew hour targets versus budgets weekly, material and equipment costs versus budgets, accounts receivables aging, cash, cash-flow, line of credit and bonding capacity.
Do You Know How to Make a Profit?
You can’t get your business to grow without making a substantial profit. Profit allows you to build your company. Without profits, you can’t grow, do bigger projects, buy the right equipment, hire better managers or supervisors, get a line of credit or increase your bonding capacity. No profit depletes all the cash from your company and leaves you with nothing to invest to grow your business, build a management team, train your employees, develop customer relationships or improve your service. Profit allows you to invest in people, systems, equipment, training, customer service, marketing, and technology. Without a good net profit margin at year-end, your business will struggle and you won’t be able to move toward achieving your long-term goals of building a business that works.
George Hedley is a professional construction BIZCOACH and popular industry speaker who helps contractors increase profits, grow and get their companies to work. To start setting financial targets and goals, email firstname.lastname@example.org to get a copy of “Profit 101 For Contractors!” To learn more, visit www.hardhatpresentations.com.