In our book, Markup and Profit; A Contractor’s Guide Revisited we talk about the ratio of employees to dollar volume of business. Many contractors ignore this ratio and instead get caught up in the urgency of building a job. This can be disastrous both to your cash flow and to your profitability.
Since 1998, when our first book was published and we began working with many construction-related businesses around the country, we’ve watched first-hand the relationship between the number of employees and the volume of business in a number of those businesses. Folks, the ratios we have in our book are right on the button.
One example: we were hired by a company to figure out why they were having cash flow problems. They sold and produced less than $200,000 of business in 2011. The company was staffed by an owner, one full time lead person and two part time carpenters. Remember, every employee generates overhead expenses simply by being on the payroll.
So, if you add up all the job costs required to build their jobs, including employee salaries or wages, then add on the overhead expenses the company has such as rent/mortgage, fuel for vehicles, the required insurances, phones, hand tools, office equipment and so on, it doesn’t take long to burn through $200,000 and still have bills to pay.
Review your books and calculate your ratio of employees to the dollar volume of work built. Then compare it to the graphs in the book.
It’s the little things in this business that can add up in a hurry and eat at your cash flow. If you’re wise, you’ll stay on top of issues like this and watch your ratio of employees to dollar volume built.
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.