Contractors can build anything, given a correct set of plans! But most contractors start a contracting business with NO plans, NO road map and only a vague idea of where they are and where they want to go. A road map would be a step by step procedure of how to get to your destination from where you are.
The first step of building a company is deciding what you want to build. This will be a bit different for each contractor but here’s a destination that most would agree with.
Example Goal: A company that can run without my daily involvement while giving me a 6-figure income. It is something that could be sold or could continue to grow.
We were able to build a business from 4 men to 100 and from $500,000 to $15,000,000. We made every mistake in the books along the way, but persisted until we developed workable systems that allow us to grow and be profitable.
The key is to go to work with a goal in mind and then work diligently towards it. I actually thought everyone operated in that manner, but I was soon disabused that idea and realized that as an employer I had to help set up the game for my employees. I had to give them targets and goals to achieve and give them rewards for achieving them.
You are building a business. A business is an organization where goods and services are exchanged for money that results in a profit. Your first step is to understand the rules of business.
Rule number one is that there are 5 vital numbers that you should know backwards and forwards, and you must have a grip on where those numbers stand in your business every day.
Gross Income (GI) is the money you collected for work to be performed or already performed.
Cost of Goods Sold (COGS) is simply the expenses directly involved with the delivery of a service or the item you sell. It is the expenses that you pay in order to do a job or project. For a contractor this is basically job costs. In construction, this would include materials, crew labor (including Worker Comp and payroll tax for labor) and sales commissions directly connected to a particular job.
Gross Profit (GP) is the money left over after you have subtracted the COGS from the GI.
Overhead (OH) is your ongoing expenses that are needed to continue one’s business operation and that are paid whether you are doing any jobs/projects or not. These include all office employees, project managers, office managers, receptionists, your CFO, your marketing department, owner’s salary, etc.
Anyone who works on a job, like a crew foreman is part of COGS. A Supervisor or Project Manager who goes from job to job is an overhead expense.
In a business, these are some expenses you will have to pay whether you have paying work or not:
We like to think of overhead as a bin that we need to fill with money from the Gross Profit.
Net Profit (NP) is the amount of money left over after you pay your Cost of Goods Sold AND Overhead.
Having a solid grasp of these 5 Vital numbers is Step # 1.
This is the first rule of business: you must make more GP than Overhead, otherwise you won’t be in business. The fact that money actually goes into the OH bin is an exercise in itself. We can point you to more complete information on how that can be done.
“Overhead is a nasty word! It is killing me!” “It is my number one target to reduce or to eliminate!” “It’s what keeps me up at night”. Some of you will be saying as you read this, “He can read my mind. Finally, someone understands my misery. Maybe he has a solution!”
Or maybe you don’t really get what overhead is! I’ve also heard that “Overhead is the machine that allows you to print money.” Wait one minute!
I used to think that once I had my basic staff in place, rent, admin pay and all my overhead expenses I could increase the sales and hold my overhead constant and start raking in the money. Well, that never happened. What I did find out is that, as I grew, I needed to actually increase my overhead!
Let me explain it a bit further in different terms.
As you grow your company, each one of these categories (the 5 vital numbers) will grow. Your company is like a hose that has holes in it, each one representing some duties that need to be performed.
The only money you can collect is money that comes out of the nozzle. The money coming out of the holes is money lost due to the fact that no one is handling those duties.
These duties are things like getting new leads, going on sales appointments, ordering materials, banking money, recruiting and hiring new crew, training staff on how to do their jobs. Believe it or not, there are, about 150 functions like this in a construction company. No wonder you’re worn out!
You may have started out covering everything with just a few workers, but, if you want to build a company that has some semblance of order and profitability, you must begin to shed some work. The flow of water is money going through your company. At a low trickle, not much water comes out, but as the flow increases (more marketing) it takes more effort to plug the holes and the water (money!) can leak all over the place. So much so that you only have a little trickle coming out of the nozzle, or none at all.
You want to turn on the water and have it blast out the nozzle at the other end.
To handle the leaks, you need to post and train capable people along the hose, with exact instructions on how to hold the hose. This will result in fewer leaks. The better they are trained, the more holes they will be able to plug and the faster the water will flow.
To build a company you must add people (overhead) and you do that one at a time.
When contractors expand too fast, they put people in a position along the hose but don’t give them the exact instructions of how to hold it so that it doesn’t leak. Now, you are paying someone who not only can’t hold a hose, but also makes a mess that must be cleaned up! No wonder overhead gets a bad name! You conclude, “I made more money when I was smaller, so lets’ stay small”. “Hey, back away from the hose bib and don’t you dare turn it up!”
Your job as an owner can be summarized in two actions that are repeated over and over:
Your crew! You must have a crew that can get the job done on time and with high quality.
You keep the marketing and sales functions and you must come up with a system to pass a job folder over to a competent crew foreman that can get it done profitably.
From our experience you will need 6 key well-trained people in place to have a somewhat smooth operation.
As you hire, train and apprentice a new person, you turn up the water. Each person must have a complete job description or hat, must be trained on it and must be able to perform.
Here’s the basic structure of your 5 Vital Numbers. This is also called a Profit and Loss Statement.
Your goal is to create the 5 vital numbers in the most ideal combination possible to result in the highest Net Profit. A ten percent net is very respectable. Your pay as the owner should come out of your overhead. If your net was 10% and $100,000 and you did not pay yourself out of the overhead, but you took the $100K, your net is in fact 0%.
In summary you have 3 very broad steps:
For more information on the Five Vital Numbers, or how to run your business more efficiently, give us a call. We’d be happy to speak with you and get your questions answered, free of charge.