How Much Profit Is Enough?
Construction business owners often ask me how much gross or net profit they should expect to make – 5 percent, 10 percent, 15 percent or more? Most don’t know how much money they should make and don’t have a specific profit target in mind. Some have heard that 15 percent is a good target to aim for, but they aren’t sure if 15 percent is net or gross. Most claim their profit goal is to make as much money as possible or to make more than they are currently making.
“As much money as possible.” Is this a target? “More.” More than what? These are not clear targets or goals.
A young mason contractor came to me for advice. He told me his five-year goal was to work real hard, be totally stressed out and hopelessly in debt, and make no money; and, he made it. I am not impressed with people who are busy, overworked or underpaid, or who boast about their latest sales figures, yet try and make as much money as the market will allow. What I admire are organized companies that create clear annual gross and net profit targets, hit these goals, and make the expected return and profit for the risks they take.
The goal in business is not to stay in business, keep your crews bust, and make as much money as possible. The goal of your business is to always make a profit. Unfortunately, 92 percent of all business owners reach age 65 with little or no net worth. It’s not how much you make that matters, it’s how much you keep (after overhead, job costs, personnel and a fair salary for the owner). Then, it’s how much your money makes.
Profitable construction company owners have a vision of what they want. They have written goals in many areas, including business, customers, operations, financial, personal and profit. They have precise annual goals, including revenue, gross profit, overhead, net profit, return on equity and average markup.
If asked to invest $100,000 in a friend’s new start up masonry construction business, what return would you want – 10 percent, 15 percent, 25 percent, 50 percent or more? After considering all the risks, I would never invest in a new construction business that didn’t offer at least a conservative 15 percent minimum to 25 percent return on equity. Likewise, the minimum pre tax net profit goal for your company should be 15 percent to 25 percent return on equity (or higher). Equity is the net worth or value of your company. Calculate your equity by adding up all the value of your company assets, including capital, equipment, cash and receivables. Then subtract all of your liabilities, including payables, loans and total debt.
Companies without precise profit goals never make enough money and, often, don’t make anything. It’s hard to hit a fuzzy, moving target that doesn’t exist. Companies that track costs, target profit, control overhead, and watch what they keep are in control, organized and a step ahead of their competition. Fix your profit target and revenue goals. Keep it in front of you all the time. Share it with your people. Track your progress. Make it happen.