After reading our last newsletter, one of our readers wrote in and asked if my recommendation of 8% profit and 8% owner’s salary was a coincidence.
Yes and No. I do like to keep things simple, but those figures aren’t set in stone (excuse the pun).
A consistent 8% profit will all but eliminate the financial problems of a construction related company. 10%, which is even better, will give you some hope of a retirement fund. 15%, which some of our coaching clients achieve, is retirement even sooner.
Having said that, 8% owner’s salary is not part of that profit. Owner’s salary is an overhead expense. It is not, nor should it be considered profit. This is a check I tell contractors to use on their CPA. If s/he doesn’t explain the difference between the two, make sure you understand that difference and treat them accordingly, then find a new CPA.
Owner’s salary also is better at 10%. Your salary must be dictated by the volume of profitable business that your company does. If you can make more than 8%, great, take it. If you can’t take 8%, and still have 8% profit left, then it is a warning sign to you that something isn’t working right. Don’t ignore that warning.