Let’s face it, every contractor strives to attain profitability. You want financial stability, success, and freedom. There’s absolutely no shame in that. When we own a business, we focus on providing great service, building a remarkable reputation, which in turn, should lead to a strong client base, and a highly profitable company, at least in theory.
Yet, time and time again, contractors run into walls. Despite the best of intentions and all that hard work, their income is barely covering overhead costs.
In hopes of reaching a higher profit, they end up taking on more work, chasing after anything they can get their hands on, which leads them into a vicious cycle. Seemingly overnight, they’re giving up weekends; abandoning their own health, relationships, and happiness in exchange for endless coffee sipping and yet another late night at the office.
Addressing this dilemma is straightforward. There’s no rocket science behind it. That being said, the simple answer frightens most of us.
I’ll give you an example of what I mean.
I sat down with Joe and Bob at Bandon Builders (not their real name) to discuss their struggles with profitability, or, more specifically, their lack thereof:
At first glance their growth looked amazing – their revenues had tripled in the past three years. But scanning further down the page to the bottom line, I spotted trouble. Serious trouble. Bandon Builders had gone from making a modest profit to losing money in that same period. As I read the numbers out loud, the looks on the partners’ faces revealed the deep sense of disappointment and frustration that had prompted them to reach out to me in the first place.
Maybe you can relate. No one wants to look too closely at the numbers because to do so requires a change of some kind, and perhaps some embarrassment or shame.
I explained to Joe and Bob that they were not the first contractors to ever find themselves in this situation and that the problem was fixable.
There are only two ways to affect your bottom line, I said…
- Increase Revenue, or
- Decrease Costs
There are only two ways to do either of those:
- To increase revenue, you either need to charge more or sell more (Bob and Joe knew selling more was not their answer!)
- To decrease costs, you either need to spend less or become more efficient in production.
When I told Joe and Bob they likely needed to increase their prices, they instantly balked, and told me it couldn’t be done.
OVERCOMING THE MENTAL HURDLE
The “increase markup” part is what makes most contractors nervous. And yet it is often where the problem with profit decline lies, and where they are leaking profits.
Sure, it’s possible to work longer and harder, along with decreasing some unnecessary overhead costs, but if one doesn’t increase their prices, their bottom line would continue to show a loss.
Many contractors and designers have a deeply embedded fear of the loss of business that may occur as a result of increasing their prices. They tend to price their services in accordance with “what they hear” other contractors are marking up, or designers are charging. They fear their competitors will get the projects if they’re too expensive.
Stop comparing and focusing on the lurking competition – there is no way you can fully know, let alone understand, what the story behind their markup is – start focusing on your numbers.
Your numbers will show you why you cannot quote a job with a margin just slightly above cost. They’ll show you the sheer number of hours that go into each job. They’ll show you your worth.
One way you can begin to get a better grasp of your numbers is to know what your real overhead breakeven percentage is – a number most people actually calculate incorrectly. Thing is, without thoroughly acknowledging your own overhead numbers, your true cost of running your business, you set yourself up for long-term failure.
STOP SHYING AWAY FROM THE TRUTH.
Thing is, when you’re uncertain of your numbers, it truly shows. Without a full understanding of your overhead costs, you won’t see the value of your services. Worse, any uncertainty you have about your numbers will surface during interactions with potential clients. You’ll come across as untrustworthy, insecure, and vague – which can be easily sensed. The only way to prevent this is to, once again, delve into the depths of your numbers. You’ll see and inevitably gain the confidence to increase your estimated costs and overall mark up and you will be left with a thriving, profitable business. This confidence and certainty will shine through, and this is always attractive to the client.
A competent, confident professional who knows their numbers and the ins and outs of their business is sought after.
Know your worth and ask for it.
If you’re not 100% sure of what the overhead breakeven percentage is for your company, you may want to get my article Go Beyond Breakeven that will give you more ideas on marking up to make a profit, as well as provide the formula for calculating your correct overhead percentage.
Wondering about Bob and Joe? Once they got a grip on their real costs, they moved past their resistance and started charging more. Today, they run a healthy, thriving, profitable, and highly sought after contracting company.
If you have any questions or comments to add to the topic – please drop a comment below. I’m happy to help and very interested to hear how others get on with implementing these tools into their business.