Twenty years ago, I attended a seminar with California remodeler Paul Winans in which the speaker talked about the necessity of earning a 30% gross profit margin. Paul leaned over and said, “Wow, if I price my jobs like that, I’ll never get any work!” He and I both left that day-long seminar with only one thing ringing in our ears: 30%, Wow!
You can guess the rest: Paul learned to earn a 30% margin and then some, and eventually sold his profitable company. And lately — over the past five years or so — I’ve seen highly successful, mature remodeling companies that earn (after accounting for over/under billings) significantly more than 30% gross profit margin.
In fact, it seems to me that as a remodeling company grows, its gross profit margin increases in lockstep with increases in customer and employee satisfaction, management maturity, and marketing sophistication. Margin increases as remodeling companies — and their owners — mature and grow more sophisticated.
Tracking how gross profit margin changes over the life of your company is an important exercise. Although the graph won’t be smooth, gross profit percentage should be relatively predictable at each individual stage of growth.
Time to Realign
I wager, however, that it will not be so predictable in the next few years, as the industry reacts to shrinking job sizes, increased reliance on need-based remodeling, stiffer competition, changes in marketing effectiveness, and the clients’ ability to access credit. So I suggest that you realign your thinking toward gross profit dollars instead of gross profit margin. This will provide more flexibility in selling jobs and managing for net profitability.
Start with the dollars you need to cover the basics — salary, overhead, etc. — then add 8% net profit to cover all of the contingencies you’ll face. (I covered this step in detail in “ Budgeting for Profit.” The formulas you’ll need are built into a spreadsheet you can download .)
One of the numbers that results from this exercise is the total gross profit in dollars needed for the year. The next step is to track sold jobs and the estimated gross profit dollars each will produce throughout the year (see table, above).
As you get closer to meeting the gross profit dollar target, you can decrease your margin slightly. Note that when the “Required Gross Profit Still to Earn” (estimated or actual) turns positive, it means that you’ve met your gross profit need for the year. From that point on, every new dollar of gross profit falls directly to the bottom line as net profit. And that’s a good thing.
Now you’re off and running with all the tools you need to complete the next short pass — meeting your gross profit dollar needs while at the same time protecting the net.