Fernando Pagés Ruiz | February 06, 2018


Profit: What It Is, Why It Matters, and How to Get It

 

DeadDrop: Secrets of El Jefe is an experimental podcast that Fernando and Dan are working up

(if you like it, give it a thumbs up, a positive review, and share it on Facebook, Snapchat, LinkedIn or however you reach out to your peeps)

 

Robot voice: The information you are about to receive is top secret—meant for ladder-climbing carpenters in the business world.

DM: For your ears only, this is Dead Drop: Secrets of El Jefe

I'm Dan Morrison, editor of ProTradeCraft, 

"To start with the obvious, if your company makes a profit, then there's a pool of money available to give you a raise."

and that is Fernando Pagés Ruiz

 Or at least to keep you employed. 

el jefe

FPR: "Without a profit, the only way to give you a raise, or keep you employed is to take a slice off your boss’s salary.

DM: And that is not a sustainable business strategy.

FPR: Let’s start and talk about what profit is and is not. 

DM: Profit is NOT the money that customers pay your boss. It is also not the bosses salary.

FPR: Some contractors confuse profit with take-home pay, which is why many if not most contractors run nonprofit operations without even knowing it.  

DM: They only last if the economy is doing very well. When the economy turns, these are the very first companies to go out of business—and put you out of a job.  

FPR: If your boss is a businessman, he or she understands how to figure out if the company is making a profit. And if you ask, he or she should be able to tell you exactly what the gross and net profit margins are for the business. 

DM: The boss's salary is a business expense. The boss is not the biz.

FPR: There are two types of profit, gross profit, and net profit.

Net profit is what the what the company earns over and above all expenses including the owner’s salary. 

DM: The boss gets a salary, the business earns a profit. Figuring out the margins is a good way to figure out if your business practices are tight or loose.

FPR: The first phase is to figure the GROSS profit. Do it by subtracting the total cost of your company's services—

DM: —including, materials, labor, and subcontracts—

—from what you charge customers.  

DM: Or at least what they pay you.

FPR: Let's break it down: If the total cost of a bath remodel, all in, from plans and permits to towel bars and cleanup is $30,000 and your boss charged $40,000 for the job, then your company made a GROSS profit of a $10,000.

DM: 40,000 - 30,000 is ten thousand dollars. The margin is the percentage of income left after all of the outgo pours out. To figure out your company's GROSS profit margin...

FPR: Divide this GROSS profit by the total price for the job, in our example, divide $10,000 by $40,000 to yield a GROSS profit margin of 25% -- looking good!

DM: But this 25% is not the true profit margin because there are other things that pull money out of the bosses bank account. 

FPR: Let’s take it one step further and find out. Our next calculation is a little more difficult, which is why your boss may not have done it. 

DM: A good way to do this is to look at the whole year, to see how much you made, and how much you spent. 

FPR: The company's total operating expenses, including the boss's salary, and any perks, such as that nice new truck

DM: Add this to the total direct costs – or job costs – to find out if the company is actually making any money. 

FPR: What really counts is not the GROSS, but rather the NET -- profit margin

DM: More often than not, you’re going to be able to complete more than one bathroom remodel per year, so scale this model up. To make the math easy, let's say you can do ten bathroom remodels in a year. 

FPR: for $40,000 each, and the costs were $30,000 per bathroom, earning your company would have earned a gross profit of $100,000. 

DM: Ten bathrooms, ten thousand bucks per bathroom, one hundred thousand bucks.

FPR: Of annual gross profit. Next, subtract from this the operating costs

DM: including the boss’s salary

FPR: To find the NET profit. We’re making up numbers here, but let’s keep going with this. Let’s say your company spent $25,000 on office and overhead expenses this year and the boss paid himself a $75,000 salary.

DM: 25 thousand in overhead plus 75000 salary is 100 thousand bucks.

FPR: You would then have a total cost and expense figure of $100,000. Since your company's gross profit is $100,000 and your expenses ate this all up, your company's NET profit is ZERO.

Sorry.

DM: When the downturn comes—and it will—you're out of a job, and maybe the boss is out of business.

FPR: Therefore, it’s important to know your company has a NET profit. Your boss can fix this situation by either lowering expenses or raising prices. Usually, a combination of the two. 

DM: This is one reason your boss is always complaining about the lumber you waste. Or the length of your lunch break. But let’s say the boss raises the regular price for a bathroom remodel by 2,500 bucks 

FPR: to $42,500 per job

DM: Let's say your crew is a little more efficient with time and materials, gaining about 500 bucks back on the job cost    

FPR: Say to $29,500 per bathroom

DM: And your boss also shaved his overhead $2,500 –

FPR: But kept his salary the same, at $75,000, Presto! Like magic: with small changes on each front you have a totally different result: Now your company is earning $13,000 per job — times ten jobs per year, which is a gross annual profit of $130,000

DM: Thirty thousand more than before. And more of that 130 k will drop to the bottom line, because the boss shaved off that extra 2500 bucks. 

FPR: From whgich you deduct $22,500 in overhead and your boss’s salary of $75,000 

DM: for a tidy little net profit of $32,500. For those of you keeping score, 32 thousand five hundred is more than zero by thirty-two thousand, five hundred dollars. On annual revenue of 425,000 bucks. The ratio of profit to revenue is called the profit margin. Another way to look at is is what percent of the top line is still left at the bottom line.

And with the numbers in this example, it works out to about 8 percent.

FPR: Which is actually quite respectable. That net profit is money your boss could save or invest in rental property to keep the crews working when jobs become scarce. And it’s also money that stays in the company coffers. Next year, you’re gonna go for ten percent, because you want to improve on things, but you’re doing OK.

DM: One other benefit to working for a profitable company is that you can get promoted another rung up the ladder.

Robot voice: Remember you get paid for what you do and what you know. This podcast is here to help you know more. If you like it, give it a thumbs up, a positive review, and share it on Facebook, Snapchat, LinkedIn or however you reach out to your peeps.

 

—Dead Drop is a production of the SGC Horizon Media Network

 

 

Comments

Short answer -- the opposite of loss...

Daniel Morrison's picture

Clearly, we are dealing with an editor...

Curious what you mean? Please expound. 

i understand your point. In a sense, yes, profit is the oposite of loss, in the absolute sense you’re right. But if I break even, did I loose? Did I make a profit? If I personally make a good living, but the company has no profit, I didn’t loose, but I also didn’t turn a profit. No? 

I'll try to be brief..... again.​

Breaking even works and can provide a "good living" until, for example, you underbid the concrete on the next project and have to come out of your (empty) pocket to faithfully fulifll your lump sum contract. Or, your client sues you for sport, and you have to pay a lawyer from your (empty) business bank account. In this case maybe profit should be called risk insurance. 

Clearly this article would be a good tool to give to your employees to help THEM understand how things simply work for the whole company. It's also a good reminder to the boss to stay on track. I think the article is written simply so anyone can understand the concept, not like American business has become, so convoluted that only the boss and his lawyers understand. Thank you for the article. keep them coming.

Daniel Morrison's picture

Wow! Glad you like it. 

We have a pretty good list of possible topics lined up, and are hopeful that they will resonate. 

So far, so good!

Dan

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