Like any other business, you start or are a part of, one of the top goals of a contracting business is to make money. And while this might seem like a pretty simple goal, the realities of modern business mean there are a few important factors you have to keep in mind; even if you’re running a relatively small contracting business.
At Contractor’s School, we’re here to not only assist with contractor licenses and other services that help you get your contracting business off the ground but also with numerous areas of current contracting business management and operations. When it comes to earning money, a common buzz term is “profit margin” – what exactly is profit margin, what sort of margin should you be realistically chasing, and what are some other variables to keep in mind here? Let’s go over a few.
First and foremost, it’s important to understand exactly what profit margin actually is as you begin to evaluate your income. In particular, some tend to confuse profit margin with their markup.
Profit margin refers to the difference between all of your business expenses, including the actual costs of the projects you carry out, and your total revenue. A markup, on the other hand, is a narrower category that speaks to an increase in price above the actual costs – that is, the cost you apply to services to allow for a profit margin. If you were only charging clients the exact amount the job cost you to perform you would be buried by overhead expenses and would never be able to create robust profits.
It’s also vital to grasp the differences between certain types of profit. Specifically, gross profit refers to the differece between the amount of money you’ve been paid for a project and the cost of the project – but this is not the only form of profit that might be considered.
In addition, you want to think about net profit. Net profit refers to gross profit minus other costs and expenses, such as paying employees.
One of the top factors that differentiate gross profit from net profit is overhead, or the costs involved in running your business that aren’t project-specific. Overhead costs include workspace and design areas, labor costs, insurance, employee benefits, administrative technology, and possibly a few other areas, depending on how your business is set up. Aligning your profit margins with overhead to lead to a final profit number is very important.
And while all of the above areas are carried out primarily with your own business in mind, you also need to be cognizant of your competitors and the industry as a whole. If you’re charging prices that are way above the industry standard to meet profit margin goals, you may have to re-assess certain parts of the arithmetic and find ways to become more competitive with your pricing.
For more on profit margins and related factors for your contracting business, or to learn about any of our contractor tests or other licensure services, speak to our staff at Contractors School today.