- Red QS
Your margin and how it affects the value of your business
I talk about margin for builders A LOT.
And I’m going to talk about it again, but this time from the perspective of its long term importance.
You already know if you have been reading our content that your margin is the cost of your offsite overheads plus your profit you want to make. It is NOT determined by market conditions, and it is NOT likely to be the same as your mate who is also a builder who you meet up with at the pub for a beer. It is a detailed calculation based upon not only how your business runs now, but what you want for your business in the future.
The offsite overheads part I think you get now, offsite overheads are the costs that are not related to a particular job that you have to pay to be in business. Think, uniforms, yard lease, vehicle insurance etc, etc. These are costs your accountant can easily show you on your profit and loss summary. They will be related to how you currently CHOOSE to run your business.
Look To Previous Years To Help Plan For The Next
Obviously a great way to get an idea of these costs is to look at your previous years in business records, how much do you usually spend? But you also need to take that historical information and use it as a guide to plan ahead. Last year you spent 10k on marketing, do you want to spend more next year? Do you need to upgrade plant next year? Are you looking to take on an office next year? Each time you look at your margin calculation make sure the offsite overheads part of it reflects not only how you HAVE run your business, but also how you WANT to run your business moving forward. This is where you can take real control by doing a bit of planning.
The second part of your margin calculation is the profit part. You may have heard me refer to this as the pot of gold… that should be guarded with your life!
There To Show The Business Makes Money
The profit is NOT a bargaining chip to win a job, and it is NOT there to cover the shortfall of a bad initial measure or a slack staff member who caused the job to run overtime. The profit is there to show that you are running a business that MAKES MONEY, rather than just one that has money running through it.
Why is this important? Well for one, for your personal life goals. It is your reward for having the kahunas to be in business in the first place, it is your reward for holding personal financial risk. It is your reward for being a good business person. It is what you will use to obtain the things in life that will make it sweeter, a boat? A batch? A trip overseas each year?
The other reason the profit is SUPER IMPORTANT is that it creates the value in your business. You may already know that a businesses value is generally a multiplier of the profit that drops out of the bottom of a business. The more profit, the higher the value of a business. So if your intention is to get it purring, then sell so you can retire or just do something else with your life, then maintaining profit needs to be high on your priority list.
So how do you do that?? By pricing properly, working out the margin that is correct for YOUR business, and not giving it away!!!