We’re often asked how to tell if a company is making money. It’s the last Wednesday of the summer, which is a great time to look back and see how your business fared. Here are a few basic things to look at.
First, the company is making a minimum of 8% net profit. That’s 8% after all bills (except income taxes) have been paid.
Along with the 8% net profit, a successful company can also pay the following out of overhead:
- The owner can be paid enough salary to cover all of their personal bills. All of them. This includes being able to set aside 10% for savings, 10% for tithing or charitable donation, and to pay all taxes. The owner should be paid enough so the family doesn’t have to depend on a second income to cover household bills.
- If the owner’s spouse is working in the company, they are also paid a salary or an hourly wage, equivalent to what they would be paid if they were doing the same work for another company.
If you can pay yourself and your spouse comparable salaries and still make a 8% net profit, you’re charging enough for what you do. That’s terrific. It’s why you’re in business.
If you can’t pay yourself and your spouse, that’s a warning sign that something is wrong. Don’t ignore it, because the problem won’t go away. Figure it out, then get busy and fix it. In my experience, the fix starts with reviewing and adjusting your markup.
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.