Profit is one of the most misunderstood and misconstrued words in the English language. Customers often think that profit is anything above a company’s cost price for a product or service and the customer’s purchase price. Employees think that profit is the difference between the selling price and the cost less their wages.
In reality, profit is the money that is left at the end of the year after all expenses are paid, including the cost of the good or service, marketing, wages and salaries, rent, heat, lights, insurance, accounting and legal costs, travel costs, training, phone bills, and taxes, of course. The list of expenses for business owners sometimes feels never ending and some companies may make as little as one or two per cent of their total sales and the good ones only 10-12 per cent profit. The truth is that 40 per cent of businesses are not making profits or are only marginally profitable.
Yet far too often business owners, and especially contractors, seem too busy to make a profit. Take, for example, a fellow I will call Jesse James who could be typical of a whole host of business owners. Jesse has owned his contracting company for a number of years and you would probably think that his business is successful and highly profitable. The truth is that Jesse is doing so many things right. He has a great brand, loyal customers, he has 40 employees and he has been around for years.
Dig a little deeper into Jesse’s business and you will find him working long hours for very little pay. Jesse might be considered one of those business owners who is marginally profitable. He might make more working outside his business for someone else than inside his own business. However, like most entrepreneurs, it would be hard for Jesse to be motivated to work for anyone else after having the freedom to control his destiny, as experienced by the owner of a business.
Like many other small business owners, Jesse is too busy to make a profit. He is caught on a treadmill of marginal work that keeps him and his team very busy. There is a never-ending cycle of bidding on work with low bid success rates, getting work that isn’t very profitable in order to keep his people employed and then worrying about when he will get paid so he can pay his team. He continues to compete for low margin work against very stiff competition that seems to outbid him 90 per cent of the time.
If Jesse and business owners like him continue down this path, the end result is one of failure and hardship. It is unlikely that competing for work at the lowest rates possible will have a happy ending. If contractors like Jesse want to succeed there are a number of things that they can do to change the trajectory of their current business. These include:
Finding better work– contractors often haven’t built up relationships with ideal clients to get work handed to them. As a result, they are caught bidding most of their projects against low cost/low quality competitors. Building relationships where you are a trusted contractor can bring in better work that enables the contractor to be profitable and keep the customers happy.
Stop giving things away for free - Most contractors I know want to keep their customers happy and have given orders to their supervisors to do the same. The outcome is changes in orders and scope creep that keep the customer happy but ensures that the project isn’t profitable. Contractors who want to be profitable need to control their costs and eliminate freebees. Customers are often happy to pay for changes and you don’t need to be giving away the farm.
Be a specialist, not a generalist: Look at any medical establishment and you will find it’s the specialists that make the money, not the general practitioners. When you specialize in aspects of your trade that your competitors may not have the knowledge in, you can ask for more money and make the margins that you need to be profitable. This allows you to pay your bills and have a retirement plan. Contractors who are generalists are often competing against a raft of others who haven’t developed their skills. As a result, they must charge lower prices and consequently have lower margins and markups.
Include good supervision and quality subtrades into your quotes: All too often contractors cut corners by getting cheaper subtrades and eliminating supervision from bids. When I asked one contractor how this was working for him, he told me directly that it wasn’t because he was having to redo work and face upset customers who complained about substandard work. Having a qualified supervisor on your jobs will reduce errors, speed up training for apprentices and save you money in the long run. Refusing to use lower quality subcontractors and explaining the reasons why you have chosen this path to customers will not only build your reputation but save your clients money in the long run.
Making a profit can be difficult at the best of times. Without a strategy to get off the treadmill of low prices and marginal work, many contractors like Jesse are facing a life sentence of hand-to-mouth subsistence. Being too busy negatively affects the bottom line and can increase your stress and reduce your profits. Having a plan to be less busy but more profitable can change your life and truly affect your happiness and your health. The question is when will you formulate that plan?
- Dave Fuller, MBA, is an award-winning business coach and the author of the book Profit Yourself Healthy. On a treadmill to nowhere? Email firstname.lastname@example.org