Raise Revenue by Understanding Overhead

Michael is the owner of a ceramic tile contracting company in Michigan who called me looking for advice. He complained about his customers continually asking for lower prices and the cheap competitors who don’t charge enough. His business was slowing down. “I can’t sell enough work at my old markup rates to cover my overhead,” he said. “So, I lowered prices another 5 percent to try to attract more sales.” His lower prices still didn’t attract enough new work. “What should I do?”

I asked Michael a few simple questions. “What’s the fixed overhead cost of keeping your business open every month? What’s the break-even sales revenue you need at the markup rates you’re charging? What’s your average job size, and how many jobs do you bid versus win every month? Do you know how many crew hours it costs to install ceramic tile per square foot?” He had no clue.

He didn’t know his job cost and didn’t track his numbers. His wife took care of the books and he took care of the contracting business, including estimating and bidding, contracts, scheduling crews, ordering materials, restocking, dealing with customers and chasing money. Odds are, his wife didn’t know the answers to those questions either, and neither of them ever discussed overall financial matters in any serious or regular way. So I politely asked, “How can I help if you don’t have any idea what it costs to keep your business open or do the work?” He said he would call me back with the answers. Guess what? I never heard from him again. I’m sure he still isn’t making a profit.

Do You Have a Handle on Your Numbers

To build a construction business, you must be focused on your bottom-line numbers, know how much sales and markup you need, know your labor costs per unit of work and always be sure you’re making a profit. You can’t rely on someone else to care about your finances as much as you do. You’re in business to make a profit, not to work hard for little or no return.

You can have someone else pay your bills, send out invoices, prepare financial reports and do the accounting, but the owner must be responsible for knowing the numbers every day, week and month. Not just once a year when you meet with your accountant and find out too late that you didn’t make what you had hoped.

Why are you in business? “To make a profit.” How much profit do you make? “I don’t really know.” Could you imagine the CEO of a Fortune 500 company who doesn’t know their numbers? Of course not! When asked these important questions, many construction business owners don’t know how much money they make. This tells me that the majority of owners don’t focus on what counts most and why they are in business.

Construction business owners spend their time trying to win enough work to keep their crews busy, negotiating with subcontractors and suppliers, building projects, scheduling and supervising field workers and doing paperwork, then hoping the bottom-line numbers work out later.

Often, these hardworking, dedicated, multitasking owners don’t like to be bothered with the numbers. So, they leave it to an untrained bookkeeper or spouse to handle and manage the money, worry about making payroll, pay the bills and collect payment. I often hear comments such as, “I do the work and she takes care of the money.”

I have been a construction business owner since 1977. I’ve hired more than 10,000 subcontractors, worked with hundreds of contractors as a business coach and presented more than 600 keynote speeches and workshops at construction conventions and company meetings.

My experience tells me that less than 10 to 15 percent of all construction business owners actually know or track their numbers. Guess what? The few who know their numbers also make the most money in their market.

Profit is the return for business ownership, taking risk and investing capital. Profit is the net amount available at the end of the month or year to provide a dividend or distribution to the company owners, or leave in the company for next year’s growth.

Net profit is the best indicator of your strategic plan, management team effectiveness, written systems, project managers, supervisors, foremen, financial systems and company leadership.

Aim at Financial Targets

Profit-driven owners and managers are competitive. They need targets and scoreboards to keep track and stay aware of their scores at all times. You can’t win a basketball game without shooting at a target (the basket), keeping score and knowing which team is ahead at all times. You can’t win a golf match without holes to aim at and scorecards.

You can’t reach your business goals by trying to work as hard or as fast as possible while not knowing how well you’re doing. At what financial, profit and job cost targets does your company aim?

Make sure each member on your team knows exactly what their specific targets and goals are.

Use precise financial targets and scorecards to keep track of results for sales, gross profit, overhead, margin, markup, net profit, return on overhead, growth, average job size, equity, working capital, return on equity, project job cost budget versus actual cost, estimated cost to complete, crew hour targets versus budgets weekly, material and equipment costs versus budgets, accounts receivables aging, cash, cash-flow, line of credit and bonding capacity.

Do You Know How to Make a Profit?

You can’t get your business to grow without making a substantial profit. Profit allows you to build your company.

Without profits, you can’t grow, do bigger projects, buy the right equipment, hire better managers or supervisors, get a line of credit or increase your bonding capacity. Zero profit depletes all the cash from your company and leaves you with nothing to invest to grow your business, build a management team, train your employees, develop relationships or improve service.

The more profit you make, the more cash you have to spend on your future and the faster you can grow and build your company. Profit allows you to invest in people, systems, equipment, training, marketing and technology.

Without a good net profit margin at year end, your business will struggle and you won’t be able to move toward achieving your long-term goals of building a business that works.

Shoot for Nothing, Hit It Every Time

I know I’ve said it before, but I’m saying it again. Most companies shoot at moving targets by attempting to make “as much money as possible” or “more than they are currently making.”

More than what? “As much money as possible” is not a target. These are not specific targets or goals. Five, 10 or 15 percent are not clear targets either. Do you have specific financial targets to shoot for and track your progress monthly?