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% more profit than companies without targets. According to other surveys, only 25% of all contractors actually make a net profit every year. Additionally, 92% of all business owners reach age 65 with $0 net worth! It's not how much you make that matters, it's how much you keep (after overhead, job costs, staff, and a fair salary for the owner).
Answer this question: "How much profit should we make?"
I’ll bet your answer was one of the following: - “5%, 10% or 15%. More! As much as I can get!" In a recent survey I conducted of over 2,500 construction company owners, I learned:
- 66% of companies have NO specific profit goals
- 70% of companies have NO overhead goals
- 50% of companies have NO sales volume goals
- 92% of all company employees have NO written goals
Shoot for nothing, hit it every time
Most companies shoot for moving targets by attempting to make ‘as much money as possible’ or ‘more’ than they are currently making. ‘As much money as possible’ is not a target. ‘More!’ More than what?
These are not clear targets or goals. Five percent, 10% or 15% are not clear targets either. 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 World Of Concrete, a young contractor asked me for advice. He told me his five year goal was to work too hard, make every decision himself, put out fires, keep his crews busy, be totally stressed out, not make enough money to hire the best people, get hopelessly in debt, and make 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 profit goals and make the expected return for the risk they take.
A specific annual sales target of $3,000,000, an overhead target of $400,000 and a net profit goal of $120,000 are specific fixed targets you can shoot for and hit. Not More! Not as much as possible!
- What is your annual sales target?
- What is your annual overhead budget?
- What is your annual net profit goal?
Run your company like a business
When I present my program "Get Your Construction Business To Work!" at construction conventions, I repeatedly learn most small- and medium-size general contractors and subcontractors do not run their companies like a business. A "business" has a business plan, sales goals, job cost goals, an overhead budget, and profit goals. A "business" pays its president or owner a fixed and reasonable salary every month (plus year‑end bonuses from the net profit). A "business" prepares monthly financial statements, profit and loss statements, income statements and balance sheets. Most importantly, a "business" makes a profit!
A "business" without ALL of the above is not a "business.” It is a place to go to work; a place to "try" to make some money; a place to "try" and cover expenses; and a place to "try" to have some leftovers to pay for the owner's lifestyle.
Get a return on your investment
If asked to invest $100,000 in a friend's new start‑up contracting business, what annual return would you want? Ten percent, 15%, 25%, 50% or more? After considering the risks, I would never invest in a new construction business that didn't offer at least a minimum guarantee of 15% to 20% annual return on investment or equity. Your equity is the amount of capital remaining after you collect all your invoices and pay all your bills.
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 your manager salaries, estimator, administration, accounting, rent, utilities, 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. You staff accordingly, rent an office, seek jobs to bid, and hope enough business comes in to make a profit. Likewise, you must also make a minimum 20% to 50% annual return on your fixed overhead investment you commit to in advance every year.
Aim at a fixed target
Construction companies should make a minimum 20% return on overhead every year. This is the minimum target to shoot for. If your annual overhead is $500,000, you should expect a minimum net profit pre-tax of $100,000.
Remember this is the minimum after paying all your overhead costs and owner’s salaries. The minimum is a very low number to shoot for. I recommend aiming at a target of 40% to 50% return on overhead as a higher target to hit.
For example, if your overhead is $500,000, your pre-tax net profit goal would be $200,000 to $250,000. Now you have a minimum target and a higher target to shoot for. 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, stay ahead of their competition. Determine your overhead, set clear profit targets, and then shoot for the revenue you need at the markup you can get to achieve your goals.
Keep targets in front of you all the time. Share them with your people. Track your progress. Make it happen. See you at the bank!
As a professional construction BIZCOACH and popular industry speaker, George Hedley helps contractors increase profits, grow and get their companies to work! He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available at his online bookstore at www.HardhatPresentations.com. E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, join a peer mastermind BIZGROUP, attend a BIZ-BUILDER Boot Camp, implement the BIZ-BUILDER BLUEPRINT, or get a discount for online courses at www.HardhatBizSchool.com.