During a recent class I taught on Markup and Profit, it was very clear that many in the audience did not know or understand that their sales volume (i.e., jobs sold, built and collected), must support the amount of money the owner of a company is paid.
A good check for a remodeling or specialty contractor to use is to divide your salary by .08. If that number is not less than or equal to your sales, you could be taking too much money out of your business.
Example:
You want a salary of $75,000 for the next 12 months.
Then . . .
$75,000 / .08 = $937,500
That means you must sell, build and collect $937,500 in business or you can’t take out the $75,000 as a salary.
If you only sell $643,962, then your salary can only be:
$643,962 x .08 = $51,517.
Drawing too much salary for the sales volume is one of the top three reasons for cash flow problems.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
What if the owner is actually working at the job site on a regular basis? Then does the same rule apply?
Kelsey: Yes, but you need to pay yourself for both physically working on jobs (which is a job cost) and owning and running the company (which is an overhead expense). You can get the details on how to do this in our book, Markup and Profit; A Contractor’s Guide Revisited.
Michael