We had a question come in this week from a contractor asking about how to calculate the volume of business a company needs to support the owner’s salary. I have written many times that a simple way of setting a sales goal for your company is to divide the salary you wish to pay yourself by 8 percent ( .08 ). (That’s for a new business. If you have been in business for 5 or more years, you can pay yourself 10 percent if your business is more stable.)
We were asked if our calculation was wrong. They stated that dividing their salary by .08 gave them a very large number – more volume than they could build. I told them that .08 is the correct number. This is all covered in depth in our book Markup and Profit; A Contractor’s Guide Revisited. However, if you are a small 1-2 person construction company, let me add a comment or two.
As the owner of the company, you should be paid a salary. If you are working on jobs, you should be paid for your labor, that is part of your job cost. If you are the salesperson, you should be paid a commission for your sales.
If you want to make $60,000 from all sources, subtract your earnings from working on jobs and your sales commission (which, by the way, needs to be included in your overhead) from the $60,000, then divide the remaining amount by .08. That is what you will need to sell, build and collect for your company to support your $60,000 income.
But if you are working on jobs, and selling, and managing your construction business, in my opinion you won’t last for long. That’s a lot of hats to wear, and each hat requires a different skill. For most contractors, the easiest hat to wear is working on jobs, because it’s the comfortable place – it’s where most construction business owners started.
Working on jobs makes it harder to actively market and sell your services, and managing your business will become a part-time function. Your odds of surviving just dropped. It will get harder and harder to pull $60,000 out of your business, and you’ll find yourself looking for a job to pay your bills.
Part of your responsibility to not only yourself, but to your spouse, your family, your company and those that may be working for you is to educate yourself on the correct math of running your business. Too many construction business owners pull too large a salary from their business, then wonder why they have cash flow problems. Don’t go that route.