Numbers to keep track of to make sure you stay in the black.
Success is the construction field isn’t easy. Only about 36% of new construction companies make it their first 5 years. Why is this? Well, construction is a difficult industry to pin down, as construction company heads need to have their fingers in various different pies. Construction owners need to work out logistics and transportation, certification and licensure, labor, IT, and of course, keeping building progress on time and on-budget. With so many plates spinning its easy to lose track of profitability.
There are a few ways that you can ensure your business’s success though. One is to keep track of the human element, such as workers and your company philosophy. Another way is to ensure you are processing your own numbers right — there is more than just revenue and expenses.
Don’t add overhead profit to job costs
The best way to explain this is with an example.
For a potential job, you have an overhead of 25 %. You also are shooting for a profit of 8%. You should get to your sales price by adding overhead and profit to the cost of your job.
Job cost: $2000
Overhead costs: 32% of $2000 (.32 × 2000) = $640
Job cost = 640 + 2000 = $2640
Now factor in profit:
8% of 2640 (.08 × 2640) = 211.2
Sales price = overhead + price + profit (2640 + 211.2) = $2851.2
One mistake people make is calculating the sales price before the overhead costs. This results in a lower over all cost and profit, and thus leaves money on the table.
Know your profit margin
Calculating an individual job cost is a great start, but knowing your yearly margins are the way to truly ensure profitability. The average pre-tax net profits for construction contractors is just a few percentage points, and for contractors, usually just a few points higher. One of the problems facing commercial contractors is that they often offer the same services as their competitors. This means that when they try sell their services, the only real area of competition is in price. Of course, this mechanism drives down prices and lowers profits and margins.
Companies need to sit down and seriously figure out a way to improve the bottom line by maximizing profits. Simply doing more work at a cheaper price point than competitors isn’t often a long-term winning strategy.
Find a balance between investing in your business and banking profit
This business doesn’t just grow on its own. It requires time, effort, and investment. Whether it’s new labor/skills for your workers, technology, or equipment, investing in your self and your company is an important step to growth and success. Marketing your company is also a great investment path. Make sure that you still save up enough for emergencies and/or rainy days, but without investment, your company won’t grow.
Know what your equity is
Equity isn’t just the total cash holdings of your company. Equity is the actual total value of your company. It’s total assets minus total liabilities. This includes not just money, but also equipment, land, and anything that has a cash value in your company. Knowing equity is incredibly important for several reasons.
- If the company or part of it has to be liquidated, you know its approximate value.
- Knowing equity helps you decide how big an investment in your company should be.
- The right equity numbers will also give you an idea of what your net profit goal should be (most construction companies should go for a minimum of 15% and go up to 30%). This helps your determine what your profit on investments will be.
Keep track of liabilities
In order to ensure you actually know your equity, make sure to keep track of liabilities. Make a spreadsheet with your loans and payments due, as well as their amounts, and dates.
The liabilities list should include: lines of credit, loans (equipment and real estate), future taxes, and labor/licensing fees paid yearly.
Know asset prices
The other aspect of equity is assets. Make sure to include your property and equipment values in total assets. Remember, property has the habit of going up in value over time, while equipment does the opposite. Be sure to accurately calculate what your equipment values are so that you don’t overestimate your asset value. Knowing the value of machinery/vehicles over time will also be a huge benefit as it can give you an idea of how much profit you are getting out of it when you use it on various jobs.
It’s important to collect what you are owed, no doubt. Make sure your company’s accountant is updating you with accounts receivable weekly. Knowing what you are owed is just as important for equity as knowing what you owe.
Make sure you have reports on your current contracts. This will let you have a good idea of when your present contracts have started, who they are with, their costs, profits, and percentage completed. Having up-to-date info on your contracts lets you know not only where your costs are going, and revenue is coming from, but also what percentage of your equipment and labor is available for new jobs.
Get your work done by the pros
If you want only the best professionals helping you ensure your construction project is profitable and successful, go with Reliable. Reliable Commercial’s 35 + years in the construction industry have made us local leaders in quality and efficient work. Ensure you get the best quality, the best profits, and the best altogether. Contact Reliable Commercial today, and we can get started on your lucrative new construction venture.