My editor said that we're taking a few weeks off for the holidays, so I want to wrap up the year by commenting on a few different issues.
It's time to review your markup. Start by looking at the markup you achieved last year. That can be done with your year-to-date Profit and Loss statement. Divide your total sales for the year by your cost of goods sold (job costs). Assuming your P&L has been compiled correctly (more on that later), you'll see exactly what markup you've achieved on your sales.
Total sales: $646,888
Cost of Goods sold: $415,785
Markup: $646,888 / $415,785 = 1.5558 or 1.56
(If your accounting is on a cash basis, you might need to fudge your total sales for the year if you've received major deposits recently, or if you recorded large deposits at the end of 2015 for job costs incurred in 2016.)
By looking at the markup you achieved, you get an idea of how close actual job costs are to your estimated costs. If the markup you achieved is close to the markup used when you priced the jobs, great! If it's not, it's time to take a look at either your estimating or your production to see what went wrong.
Of course, look at your net profit as well. If you expected an 8% net profit and achieved a 2% net profit, either your job costs or your overhead expenses were too high. Figure it out, and fix it.
After looking at what you've achieved, use your projections for 2017 to calculate the markup you need. If you're a remodeling company, your markup will probably be in the 1.50 to 1.70 range. New home construction markup will normally fall within the 1.26 to 1.40 range. If you are doing specialty work, your markup range is normally 1.35 to 1.50. It's important to do your own math to know exactly where your numbers are at. Don't take anyone else's word for what your markup needs to be. Do the drill and get it right.
Profit and Loss Statements
When we talk about markup ranges, those ranges assume that your books are set up properly. If your accounting lists job costs as an overhead expense, or if overhead expenses are included under cost of goods sold, it's wrong. It will be difficult to calculate your markup or understand where your business stands financially if your P&L isn't set up properly for a construction-related business.
It's not uncommon for us to receive P&Ls that are set up wrong, and it's usually because the CPA or bookkeeper doesn't understand construction accounting. If you have the book Markup & Profit Revisited, you'll find instructions on how to download a sample chart of accounts for a construction business. We borrowed this chart of accounts from Karen Mitchell of Online Accounting; Karen is the author of Contractor's Guide to QuickBooksPro, and also has a two-hour video on our website on construction accounting. Don't assume that the professional you've hired is doing it correctly; check it for yourself.
You might also take a look at our Markup Calculator software program. This program will help you calculate your markup or calculate an hourly rate if you're doing handyman work.
Taxes are the fee you pay for being in business and making a profit. You don't have to like them, but you have to pay them. That applies to payroll taxes as well; it's easy to withhold taxes from employees, it's a lot harder to pay them.
So make sure that your taxes are paid, and on time. I recently had a discussion with a young contractor who'd assumed that his CPA was paying his taxes. It was a reasonable assumption; he'd given the CPA over $50,000 over several years to pay the taxes. Instead, his CPA pocketed the money.
Guess who is being held responsible for the taxes? That's right, our contractor friend. It seems reasonable to expect a CPA to pay your taxes when you give them the money, but as the late President Reagan said, "Trust but verify."
We published an article on fraud and embezzlement many years ago; it's included in our Newsletter Archive. Protect yourself.
Are you getting enough leads from your website? I talk to many contractors who've spent a small fortune on their website design and with search engine optimization companies who promise heaven and earth. They might have a beautiful website, but they still aren't getting any leads.
If you aren't getting leads from your website, it's not the fault of the buying public. It's most likely because they aren't finding your website.
SEO isn't rocket science, but it's a specialized skill. You need someone who knows what they're doing and understands the construction market to help tune your site to attract the right visitors. Remember, nothing happens until somebody sells something at a profit. You can't sell your services if you don't get called. I recommend that you look at Brian Javeline's information. Our coaching clients tell us that Brian gets the job done.
Two more things. Remember to stay focused on sales. Getting jobs built is easy; making the sale is hard. Read Profitable Sales; A Contractor's Guide so you know how to sell your jobs. Then return all phone calls the same day or by nine am the next day. Show up for all appointments, on time. Be a professional.
Finally, is your business doing well? Are you able to provide for your family, your business and your employees? We hope each of you has had a great year and we're hopeful for an even better 2017. Don't let things happen: make things happen. If you need help, give us a call.
Merry Christmas and Happy Holidays to you from us. We're your biggest fans. We wish you, your families and your employees the very best for 2017.