Net profit is more important to an owner than revenue and it’s more controllable. Think about it – revenue is a function of marketing where you have control over your activity but not over the outcome. Net profit is very different from this. You have control over both the activity and its outcome.
After all, net profit is what the owner keeps and is therefore more important that the revenue the business generates. If the business generates revenue of $2 million and a net profit of 5% the owner has a mere $100,000 for next year’s equipment purchases, business development costs, or personal wealth building.
If this meager 5% net profits could be increased to 15% that would increase discretionary cash to $300,000. Now that is worth getting excited about. So how do you accomplish this and what steps can you take to achieve it? Why don’t you first do just as we did with revenue and determine your three year average annual percentage of net profit.
Let’s compare that against some benchmarks and see how well you are doing. Identify your net profit as a percentage of gross revenue for years 2013, 2014 and projected 2015.
Simply divide your net profit by gross revenue and convert to a percentage. For example if your gross revenue is $1.2 million and your net profit is $90,000 your net profit as a percentage is 7.5%. Do this for three years and then divide by three in order to get an average annual net profit percentage. This gives you the clearest picture of how well you are doing at protecting your net profits.
Industry net profit benchmarks:
- Less than 5% = horrible
- 5% - 10% = poor
- 10% - 15% = average
- 15% - 20% = good
- 20%+ = outstanding
How did you do, and what do you think about your company’s profit margin? How do you go about improving net profit and what might happen if you gave as much attention to profit protection as to revenue generation? Remember, you can control the outcome of the one but not the other. As with revenue growth you must plan your way to improvement and then execute well on those plans to achieve the goal.
Here are several positive steps you could take:
- Set goals for each revenue source.
- Make your major material purchases from wholesale distributors to increase per job profit.
- Upgrading the skills of your estimators can help insure they leave less of unstated charges on the table.
- Xactimate has internal features that can help you take control of material and labor costs – most per job profit is lost right here!
- Don’t take bids from subcontractors.
With a reasonable profit goal in place for each source of your revenue you can assess how well your operation achieves the goal. For example, I am big on stating that restoration contractors can and should be earning 50% profit on every construction rebuild job, every time! How well are you doing? If you are at 28% - 32% like most contractors you have a lot of room for improvement.
If you can raise the bar to 40% imagine what that would do to cash flow and cash reserves. How would you like to make payroll just once without the mad dash to collect payments so you can pay your staff? Cash flow eases the strain of business and higher profits are the best way to improve available cash.
There are a lot of opportunities to save money on material purchases. There are flooring distributors that sell all the major brands of flooring at 35% - 50% below retail.
Flooring is typically the single largest line item on any repair estimate. If you can save big on this one purchase you are well on your way to improving your per job profit. But in addition to flooring there are discount programs for paint, material sundries, drywall, cabinets and others that each adds another notch to your profit percentage.
Do this consistently and you will ratchet up the profits getting closer to 50%.
Every contractor knows that their estimators leave money on the table on nearly every estimate written but they seem unsure how to put a stop to sloppy practices. Many owners find that their estimators are self-taught in the use of Xactimate and many of the most valuable features of the program are unknown to them and therefore unused. A good estimate review of all or some of the company estimates will help expose the areas that require additional training or accountability.
These common problem areas include flooring, roofing, decking, and the trades. Here’s a freebie – if you are not using drop and fill for your flooring you are losing a ton of money on every flooring estimate. There is a percentage of improvement to be had in your estimating department that can move you several more notches closer to that 50% profit goal while following insurance company guidelines.
The lack of control of material and labor costs is the #1 profit killer in most companies.
What controls for material purchasing are in place to insure your workers don’t purchase 15 sheets of drywall when you are paid for only 10? How do you prevent your painter from paying $32 a gallon for paint when you are paid only $26? Get the picture? Purchasing procedures need to be in place to limit purchasing to what you are being paid or you will lose big time and you won’t even know it.
This area is crucial to your profit success.
Do you accept bids from subcontractors? Many contractors ask two or more subs to look over the work to be done at a job site and then take the lowest bidder. This is no different from what most consumers do and with the same disastrous result. What would you think if I told you that Xactimate offers several internal management features that can help you calculate an appropriate labor number for your subs that will be enthusiastically accepted 95% of the time? This procedure enables you to lock in your labor profit per job saving you a lot of money!
Taking control of your internal operation to insure top profits on every job is not as hard as you might think and the rewards to you and your company are monumental and life changing.
If you are disappointed in your net profit or intrigued by the possibilities of taking control of your construction management services call me for a FREE 30 MINUTE CONSULTATION and let’s talk further about these things. I am confident we can raise the bar and increase your net profit going forward. You have a lot to gain by making that call. The time to begin preparing for next year’s year-end is right now. You can complete your assessment within weeks, prepare a plan to address the most vital changes needed, and implement those changes before the start of next year and gain the benefit of those best practices throughout the entire year. 2016 could truly be a better year in many ways for you than 2015 has been. The time to act is right now! This is the third and final part of my three part series “Grow Your Restoration Business with a Strong Year End”. To read the entire series right now visit my website at www.growmyrestorationbusiness.com/blog