Return on overhead
An easier way to calculate your company sales and profit goals is to use the ‘Return On Overhead’ (ROOH) method. Like investing in equity in the previous example, construction company owners also invest in overhead to build and run their businesses. Likewise, they also should get a return on their overhead cost. The average ROOH for contractors is 20 to 40 percent ROOH for subcontractors and 25 to 50 percent ROOH for general contractors.
Return On Overhead Example
1. Annual Overhead $ 500,000
2. Annual Return On Overhead Goal X 40%
3. Annual Net Profit Goal (Pre-Tax) = $ 200,000
4. Annual Overhead Expenses + $ 500,000
5. Annual Projected Gross Profit = $ 700,000
6. Average OH + P Mark-Up 30%
7. Average Gross Margin OH & P Profit _ 23%
8. Annual Sales Revenue Required (5 / 7) $ 3,043,478
In this example, the company will hit its’ overhead and profit goal if it averages 30 percent mark-up and does $3,043,478 in sales revenue.
Do you have overhead & profit goals?
- What’s your net profit goal?
- What’s your overhead goal?
- What’s your gross profit goal?
- What’s your average markup?
- What’s your revenue goal?
Companies without precise profit goals never make enough money and often don't make anything. It's hard to hit a fuzzy target that doesn't exist and moves around. Companies that track costs, target profit, control overhead and watch what they keep are in-control, organized and one-step ahead of their competition.
George Hedley works with contractors to build profitable growing companies. He is a professional business coach, popular speaker and best-selling author of “Get Your Business To Work!” available online at www.HardhatPresentations.com. To sign-up for his free e-newsletter, join his next webinar, be part of a BIZCOACH program, or get a discount coupon for online classes at www.HardhatBizSchool.com, e-mail GH@HardhatPresentations.com.