Editor's Note: This is the third in our 2007 series of The Business Owner Toolbox written by our regular columnist, George Hedley. Each article is written to provide you with practical, immediately applicable business management tools to assist you on your path to building a successful, growing business. To read the previous article, click
- What's your fixed cost of doing business?
- What is your annual overhead budget?
- How do you determine your markup rate?
- What's your actual labor burden rate for each of your employees?
- What's your annual cost for every piece of equipment you own?
- Which project type do you make the most money on?
- Which superintendent or foreman makes you the most money?
- Which customer do you make the most money on?
- How do you determine your change order markup rate?
- How much money did your money make last year?
Who Minds Your Store?
Ninety-five percent of your competitors have no answers to any of these basic business questions. Do you? Most often, answers to these important questions and financial business decisions are left up to a bookkeeper (or spouse) who doesn't really know how a construction business can maximize their bottom-line if managed properly. You can't make enough profit in the construction business for the risk you take. The competition won't let you. They don't know what it costs to build their jobs. So, they bid work cheap to keep their crews busy and to create cash flow to cover their boat and pickup truck payments. How can you compete with this? It's impossible unless you pay close attention to your financials, manage your costs and watch the little things that add up to big dollars over time.
A contractor called me from Michigan several weeks ago and he told me the economy was bad and work is slow. He said he can't get any new work at his old markup rate and has since lowered it another 5 percent, but he still can't get any work. I asked him the first three questions listed above. He had no clue. So I semi-politely said: "How can I help you if you don't have any idea what it costs to keep your business open?" He said he would call me back with the answer. Guess what? I haven't heard from him again.
You don't make money building things. You don't make money doing great work. You make money by knowing what it actually costs to run your company and what to charge for labor, equipment, materials, subcontractors, overhead and profit. So here's a list of things to boost your too slim bottom-line profit margin.
Ten Tips to Peak Your Profits
1. Watch Overhead Costs
First and foremost, you must know what it costs to keep your doors open without any work under construction. This is your break-even minimum you must cover before you make a profit. Make it a priority to sit down with your professional accounting manager and get a handle on this most important amount. Then trim the fat. Look at every overhead check you signed last year. Where are you wasting money? Look especially at your insurance costs, expense account items, office supplies, subscriptions, phone bills, postage, shipping costs, employee expense accounts, utilities, cell phone bills, computer and internet costs, copy machine costs, accounting and legal services and your own credit card charges.
When I took a hard look at our overhead costs a few years ago, I found people were abusing the "company" accounts and ordering more things than we needed. Consider outsourcing payroll services, craft training, project scheduling, marketing services, safety programs and equipment maintenance. By outsourcing, you'll free your staff to take care of the important things that make you money. And, most likely, you can eliminate at least one full-time employee.
2. Use Accurate Labor Burden Rates
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