Editor's Note: This is the seventh 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 here . To read the next article in the series, click here .
When I ask a construction business owner or manager: "Why are you in business?" He usually answers: "To make a profit." Then I ask: "How much profit do you make?" Most of them don't really know.
A majority of construction business owners and managers don't focus on what counts most: their numbers. Business owners and managers spend their time getting jobs built and then hope the bottom-line numbers work out. Often, these hard working people don't like to be bothered with the numbers and pass them off to a bookkeeper or spouse to handle, manage and worry about.
I have been a general contractor since 1977, worked with hundreds of subcontractors and presented keynote speeches and seminars to tens of thousands of construction business owners and managers. The sad truth is only one out of twenty business owners will ever become financially independent. And even worse, one out of eight construction businesses fail every year. Why? The top three reasons for business failure include not enough profit, too little equity and slow collections. See the pattern?
Only One Out of Five Will Thrive!
You don't want a business that struggles, doesn't make enough money or fails. I'm sure your goal isn't just to stay busy and create enough revenue to pay your bills. But this is the norm in the construction business, as owners focus on the wrong things everyday. If you watch 95 out of 100 general contractors, builders or subcontractors and follow their progress for ten to twenty years, you'll hear the same story over and over:
-They work too hard for their effort and risk.
-They never make big money.
-They never have any money leftover to invest.
-They never get out of debt.
-They can't stop working because they need money to live on.
Out of every 100 construction business owners at age sixty-five:
- Only one will be independently wealthy.
- Four will be financially secure.
- Twenty-four will still be working out of necessity.
- Thirty-one will be dead.
- Forty will be broke and need social security to make ends meet.
It seems as if business owners hope their efforts will eventually make them wealthy or give them financial freedom. But the odds that they hit a jackpot, win the lottery or inherit a fortune to create wealth are better than creating wealth by continuing to do business the way they currently do.
Construction business owners deserve better. But it takes a plan and focus on the necessary numbers to keep you headed in the right direction. The following is a list of nine necessary financial numbers you must know, track and review on an ongoing weekly and monthly basis-even if you hate numbers!
1. Know your profit numbers.
Are you hitting your profit goals? Do you even know what your profit target is or should be? How do you determine your net profit markup? I conducted a survey of over 2,500 construction business owners and managers and discovered less than 40 percent of all companies had specific written net profit targets. According to the Construction Financial Management Association ( www.cfma.org), the average pre-tax net profit for general contractors is between 1.4 and 2.4 percent and for subcontractors between 2.2 to 3.5 percent. This is not enough profit to compensate the risk contractors take.
Contractors and subcontractors get in a rut of providing the same services as their competition to the same customers, year-after-year. Contractors generally offer the minimum per plans and specifications and do
