Basic Accounting: How much profit did your business make?

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How much money did your contracting business make?

Let’s say a company grosses $1,000,000 per year. After paying all the expenses to cover the costs of the work performed, and the expenses to keep the lights on in the office and such, there is just enough left over that the owner, who does sales and runs the business full-time, can draw $100,000 in salary.

What’s the profit?

Too many people say 10%. Yes, $100,000/$1,000,000 is 10%. If the owner played golf all day, every day, while others ran the business, that $100K would be profit. But that’s not the case here, and that $100K isn’t profit. It’s an expense! It’s to cover someone “who does sales and runs the business full-time”, and if the owner didn’t, she’d have to hire someone to do it. When you subtract that out, profitability is 0%. Yes, ZERO. The owner is buying herself a job, but the business isn’t really making any money. She could make the same amount by going to work for someone else!

It might even be worse than that. What if it would take $120,000 to hire a general manager to replace the owner in running the company? And what if the owner complained of being so overworked that they’d even have to hire a half-time assistant at $30,000 to reduce that load? Now the company would actually be losing $50,000 per year! Minus 5%!

It’s hard to sell a business losing 5%. You might be able to sell your old trucks and a customer list, but that’s not a lot to show for many years in the business. Unfortunately, it’s too common.

A lot of companies are in that boat. The owner working too hard, for too little. For many, it would have make more sense working for someone else.

Don’t let that be you. Understand your numbers. And fix what you need to fix to run a sustainable business profitably.

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

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