Siegal: Focus on Profit, Not Volume

by Kyle Clapham

Now that all the government stimulus money is out, and the tax credits have been used, contractors should start focusing on building their business.

Now is the time to look at the types of work we are doing and determine where our core competency is and what types of projects are most profitable for our businesses. Once we identify those specific projects, then marketing and sales should focus on generating more of those types of projects.

Many times, contractors fall into the trap of building the volume of the business. They work for builders and general contractors who can give them a lot of volume, low margin and low profit work.

This can make a contractor temporarily feel good because they see their business revenue growing quickly, but seldom is there much profit tied to all that extra work. They are basically practicing doing work and not profiting from doing the work.

For many years we have seen building product manufacturers do the same thing, i.e., sell volume at the expense of making a profit. After a banner year of sales, many manufacturers have either no profit or very little profit to show for all the effort. What they do have are the bragging rights about how much they sold and how much bigger they are than a competitor.

For years there have been best-selling books, national business magazine articles and newspaper business sections about how important market share is. Contractors also think they need to become the big player in their market.

But growing market share comes at a cost. Most companies don’t make money when they are focused on market share.

What can you do to streamline your contracting business, so you can be more profitable? Have you looked at the bottom line of the new construction work you have done and compared that to the private or negotiated work you have done?

For years I’ve been fascinated with the amount of focus that some contractors place on gross sales, especially the large commercial contractors. It seems like they always want more because of the bragging rights that go along with the big numbers. Instead of talking profit, I hear about how many people they have, how many cranes they have, etc.

The topic that is seldom discussed is net profits. How often have you heard someone say, “I want to double my sales”? Which would you rather do, double your sales or double your profits? And does doubling your sales mean that you will double your profits? I certainly have not seen that on most contractors’ financial statements. Many times, profits remain the same or even shrink.

There are numerous examples of contractors who ended up losing enormous amounts of money because their desire was to dramatically increase their sales. From my perspective, net profits are much more important than gross sales.

If your goal is to double your profits, the easiest way to achieve that goal is to apply the 80/20 rule to every aspect of your business. We have discussed the 80/20 rule at many Certified Contractors Network meetings. The 80/20 rule basically says that a little bit of one thing generates a lot of something else.
Here are some examples:

  • 80 percent of your profits come from 20 percent of your products (or projects)
  • 80 percent of your sales come from 20 percent of your salespeople
  • 80 percent of your complaints come from 20 percent of your customers
  • 80 percent of your internal problems come from 20 percent of your employees
  • 80 percent of your results come from 20 percent of your activities

In other words, up to 80 percent of your time is wasted. If you start analyzing everything you and your contracting company does, it’s easy to see the impact of the 80/20 rule.

Focus your time, effort, energies and resources on work, tasks, projects and opportunities that will have a huge payoff. Stop doing everything else. It’s that simple.

There is much more profit with private accounts. Isn’t the cash flow better from private accounts? And isn’t the risk far less with private accounts? The contracting industry has done a fine job developing technical training, but it has basically dropped the ball when it comes to quality business training.

Due to the lack of training, many contractors do not have financial literacy. They do not know how to calculate the right price and determine what returns to expect from their investment. Many contractors price their work based on the so-called “going rate.”

The “going rate” throughout most of the country is typically 30 percent lower than the actual rate a contractor needs to build a viable business. Without the right price, the contractor cannot provide the proper training, the proper equipment and safety instructions, or the proper compensation and benefits packages that attract and retain quality personnel.

A focus on profit, not revenue, cures all that can ail a company. QR

Scott Siegal is the owner of Maggio Roofing in Washington, D.C., and also owns the Certified Contractors Network. You can learn more about CCN by going to the website contractors.net.

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