Only half of all small businesses survive their first five years. You can bet that this applies to the construction industry where razor-thin profit margins mean the difference between success and failure. But what is the ideal profit margin? And what can construction companies do to hit their profit margin goals? These are the questions a construction lawyer in Clarksville, TN, will be answering in today’s article. For all of your construction-related legal needs, the team of attorneys from Cotney Construction Law are standing by.
The Ideal Profit Margin
The ideal profit margin is what your specific company needs in order to thrive. Your company’s gross profit margin should be enough to pay for taxes, administration costs, and your own salary. The goal is to have a net profit margin that comfortably puts you in the green. Unfortunately, that’s not what we’re seeing in the construction industry.
A study conducted by the National Association of Home Builders (NAHB) in 2017 found that, while profit margins have been steadily increasing, home builders are averaging gross profit margins of 19 percent and net profit margins of 7.6 percent. Although this is an improvement from 2008 when gross profit margins stood at 14.4 percent, this may still not be enough for companies to cover the cost of doing business, especially in other sectors of the industry. If bankruptcy ever threatens to derail a project you’re working on, consult a construction law attorney in Clarksville, TN.
Setting a Net Profit Goal
Construction is one of the most competitive industries on the planet. Contractors are constantly trying to one-up each other by offering to do the same work as their competitors for less. In order to remain profitable and competitive, you will need to set a goal. To set an appropriate goal, you will first need to look at your company’s net worth.
Your company’s net worth is how much it’s worth — assets minus liabilities. Only after discovering how much your company is worth can you hope to grow it. Your net profit goal should be about 25 percent of your company’s net worth. So if your company is worth $1,000,000, your net profit goal should be $250,000.
The Cost of Doing Business
Now that you have a goal, it’s time to make it a reality. In order to do that, you’ll need to determine all of your expenses and profits. How much does it cost your company to keep the lights on each year? This is your overhead. Many people make the mistake of calculating overhead after sales; however, your company is still going to have costs regardless of how poor or well it does in a year. For this reason, you should estimate your overhead every year so that you can determine the sales you need to make to overcome your overhead and subsequently profit.
Setting a Sales Goal
Here’s another goal you can set. First, take your overhead and add the net profit that you’re comfortable with. Next, divide this number by the average gross profit percentage ((total sales – the cost of goods and services/ total sale) x 100 percent). This will give you the sales goal you need to reach to meet your goals.
Let’s say that your company’s overhead expenses total $750,000, and your net profit goal is $300,000. This gives us a gross profit goal of $1,050,000. Now, let’s assume your average gross profit is 20 percent of your gross profit goal. When we divide $1,050,000 by 20 percent, we land at a sales goal of $5,250,000.
Setting goals and sticking to them is a challenge, especially in an industry that already demands so much from contractors. But if your company can achieve higher gross profit margins than its competitors, it’s in a better position to outperform and outlast them.
Remaining competitive and profitable in this industry means surrounding yourself with a knowledgeable team that can pick up the slack when needed. When it comes to setting profit goals, an experienced accountant or consultant can go a long way towards ensuring your success. Unfortunately, not all issues can be solved with number crunching. To ensure that your company not only survives but thrives, we recommend partnering with a construction lawyer in Franklin, TN.
No matter how established a business may be, it will always encounter problems that threaten its success. Misclassifying workers, bankruptcy, and bid protests are just a few of the issues that contractors can encounter despite their best intentions. For an ally who can guide your company through any legal hardship, turn to the team of affordable, on-demand attorneys from our Tennessee law firm.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.