Chasing Profit, Not Dollars

Ask a contractor how he did last year, and you’re likely to get an answer like, “My sales were up 15%.” Well, that’s very nice, but if you increase your volume without maintaining or increasing your net profit, then all you’re doing is adding a lot of extra work for little tangible reward.

Bear in mind that keeping busy isn’t the same as making money. As the number of jobs increases each year, so does the need for more management. As you add more jobs, you need to add additional field personnel, and that increases the demand for scheduling and overseeing. If you increase your volume by taking on more jobs and running them concurrently, you may need to add to your stable of subs so your own jobs don’t compete for them.

Finding, qualifying, training, and monitoring new subs is time-consuming and somebody will have to be assigned to do it. You will probably find that scheduling for shared resources, whether personnel or equipment, takes up a bigger percentage of office support time. Increasing your volume by taking on different kinds of jobs (example: switching from remodeling to whole house construction) will almost invariably be costly simply because you will need to learn how to estimate, schedule, and manage jobs that you aren’t used to.

Performing work beyond your experience range provides the opportunity to (a) expand your services or (b) go broke. When you begin to add management personnel, your overhead increases significantly. Keep in mind that management personnel, while vital to the smooth operation of your company, don’t bring in any dollars. You’ll need to sell enough additional work at a high enough profit to cover their costs. This can lead to an escalating cycle where you expand your crew to increase your volume, then buy new employees to manage the crew, and then have to take on more jobs to cover the management. Meanwhile, your profit figures may be oscillating downward.

So watch your bottom profit line at least as much as you watch your top sales line: it will give you better information about whether or not your increased volume is paying off!