When speaking at conferences, I often ask this question: “What’s your profit goal?”
The typical answer is always the same: “As much as we can make!” In a recent survey I conducted of over 2,500 construction company owners, I learned that 66 percent of companies have no specific measurable profit goals. Seventy percent of companies don’t know what their actual annual overhead costs are. Fifty percent of companies have no specific or measurable sale revenue goals.
To make matters worse, less than 10 percent don’t even know if their bid rates for labor, equipment, and field crew production were accurate. Without fixed goals which are tracked and monitored, how can companies expect to make the profit they want to make? Unfortunately, too many contractors shoot for unclear moving targets by attempting to make “as much money as possible” or “more” than they are currently making. These are not clear targets or goals. As your sales and job costs vary each month, your total markup earned changes, while your fixed cost of doing business remains the same. This causes your net profit to move up and down like a roller coaster.
After hearing me speak at the World of Concrete trade show, a young contractor told me his five-year goal had been to work too hard, make every decision himself, put out lots of fires, keep his crews busy, be totally stressed out, not make enough money to hire the best people, get hopelessly in debt, and make little or no money. And the bad news was he had achieved his goal! I am not impressed with people who are busy, overworked, underpaid, or boast about their latest sales conquests. I admire organized companies that hit their specific bottom-line overhead and profit goals and make the expected return for the risk they take.
Specific measurable targets such as $5,000,000 in sales, overhead at $800,000, and $400,000 net profit are fixed targets you can shoot for, measure, and achieve. These targets are not percentages, “more,” or “as much as possible.” When you set profit margin goals, is that a markup, gross profit, or net profit goal? Or is it your taxable income after overhead costs? Also, what happens if your sales revenue goes down by $1,000,000?
BUSINESS APPROACH
The goal in business is not to stay in business or keep your crews busy. The goal of business is to always make a profit. According to a Construction Financial Management Association study, companies who have specific strategic plans with clear targets and goals make 33 percent more profit than companies without targets. According to other surveys, only 25 oercent of all contractors make a net profit every year after overhead costs. Overhead costs include a fair market salary, benefits, and compensation for the owner who is the president.
A “business” has a business plan with measurable sales and job cost goals, a fixed overhead budget, and net profit goals. A “business” pays its president or owner a fixed reasonable salary every week, plus year end bonuses from the net profits. A “business” prepares monthly financial statements including profit and loss income statements and balance sheets. Most importantly, a “business” makes a profit. A “business” without a profit is not a “business.”
If asked to invest $100,000 in a friend’s new startup contracting business, what annual return on investment would you want? Ten, 15, 25, 50 percent or more? I would never invest in a new construction business that didn’t offer at least a minimum guarantee of 15 to 20 percent annual return on investment. This return is distributed from the profits based on the pro rata share of ownership.
Your fixed cost of doing business (overhead) is an investment in your future ability to make a profit as well. Overhead includes the cost of doing business and includes owner and manager compensation, estimator, administration, accounting, rent, utilities, sales, marketing, and other fixed expenses to keep your doors open. Every year, you decide what fixed overhead costs you will need to run your business. Accordingly, you hire staff, rent an office, seek jobs to bid, and hope enough sales comes in to make a profit. Likewise, you must also set a minimum target to make a 25- to 50-percent annual return on your fixed overhead investment you commit to spending every year.
The average construction company makes 50 percent return on overhead in net profit every year. This is the target you should shoot for. If your annual overhead is $500,000, you should expect a minimum pre-tax net profit of $250,000. Remember this is after paying all your overhead costs and owner’s salaries. These are specific goals you can aim at and then track your progress every month.
Companies without precise overhead and profit goals never make enough money and probably won’t make a profit. It’s hard to hit a fuzzy target that doesn’t exist and moves around. Companies who track costs, target profit, and control overhead are in-control, and stay ahead of their competition. Determine your overhead, set clear profit targets, and then shoot for the revenue you need at the markup rate you can get to achieve your goals. Keep targets in front of you all the time, share them with your people, and track your progress.
About the Author
George Hedley CPBC is a certified professional construction business coach and speaker. He helps contractors build better businesses, grow, profit, improve estimating and field production, and get their companies to work. He is the best-selling author of Get Your Construction Business To Always Make A Profit! available at Amazon. For more, visit www.constructionbusinesscoaching.com or contact gh@hardhatbizcoach.com.