Contractor Talk - Professional Construction and Remodeling Forum banner

Alright businessmen ... I'm gonna give it one more try ... breakin even

7K views 30 replies 13 participants last post by  dirt diggler 
#1 ·
k guys, im givin my wacky theory another "go" ... it's Friday night and im waitin on dinner ...

Before you read any further ...

1) All numbers and dollar amounts, percentages, etc. are hypothetical.

2) Do not, again, do not look at the numbers. Instead, look at what the numbers are doing

3) Terms & definitions. This was a huge hang up last time, b/c whether by my fault or not - some people got confused on words.

4) Yes, I realize not every job costs the same ...

5) I do not claim this to be gospel ...

Gross Profit is the difference between Revenue and Variable Costs (your project's costs)

Revenue - Project Cost = Gross Profit.

Overhead is the cost of doing business. Not the cost of your project.


ok ...





you have an overhead of $200,000

you have 50 work weeks in the year (2 weeks off for holidays).

you have 40 hours in a work week

you have 2,000 hours in a work year.

your hourly rate is $100. Why? because you have taken your overhead and divided by the number of hours in a year. 200,000 divided by 2,000 equals 100.






ok ... with me?



You install fiberglass pools. You offer a "standard" package. This includes ______ and although you sell options (add-ons), you offer a standard package.

This standard package takes you 50 hours to install.


(stop. now you're going to say "well what about extras and this and that---" .... stop. If there is anything "extra" that deviates from your "standard" package ... it is called an "option" or an "add-on")


ok. You install fiberglass pools and a standard package takes you 50 hours to complete. You have an overhead of $200,000 and 2,000 hours in a year.



Now ... to install this standard package ... it will cost you $40,000 in materials and any outsourced labor (your in-house labor, i.e. employees are included in your overhead).

You will spend $40,000 to install this standard package for you customer.




ok? with me so far?


Revenue (price your customer sees) = ?
Project Costs (what you'll pay) = $40,000
Gross Profit (Revenue - Project Costs) = ?
Hours to Complete Installation = 50
Hours in a Work Year = 2,000
Your hourly rate = $100


If the installation of your standard package takes 50 hours, you, alone, only are capable of installing 40 pools in the year.

(do not think about hiring employees or anything else right now until this part sinks in)

I repeat ... If the installation of your standard package takes 50 hours, you alone only are capable of installing 40 standard pools in a year.



you have a $200,000 overhead and are capable of selling 40 standard packages because there are only 2,000 hours in the year.


How much does your gross profit need to be?
Remember. This is the mathematical difference between your revenue and project cost. This is what you will use to pay your overhead.



Ok ... so how much should this gross profit be?

Well ... how much will the market tolerate?

Will you buy this standard package from me at $240,000??

probably not. But damn - I could have spent the $40,000 on the cost of the project ... and had a gross profit of $200,000 ... and I could have paid my overhead. I could have broken even.



On the other extreme.... can I sell you this standard package for $40,000. Yep - probably. Because everyone else is going to be much higher --- YAY!!!! A SALE!!!


oh wait ... it'll cost me $40,000 to build it. My gross profit will be zero ... and I won't be able to pay my overhead.


Ok ... can I sell you this standard pool for $60,000 ??

Yes?? Really?!? GREAT!! Can't wait to start!!

Why did you say "yes" just now?? (play along if you didn't, lol).

it's because that is a competitive price.

It STILL costs me $40,000 to install that pool rather you bought it from me for $40,000 ... or $240,000 ... or $60,000. It STILL costs me $40,000 to install it.


NOW --- YOU bought it from me because the price that you see is competitive --- heck, it's right around everyone else. That price is tolerated by the market

And since you bought that from me ... I will spend $40,000 to install it ... and I will earn $20,000 in gross profit. That gross profit is tolerated by the market.



With me?

Revenue = $60,000
Project Cost = $40,000
Gross Profit = $20,000



Now ... your gross profit is $20,000. This will be used pay your overhead for the year.

Your overhead is $200,000


You will need to install 10 standard packages to break even.

On your 11th installation ... you will have $20,000 in profit.
By your 12th ... you will have $40,000 in profit
By your 13th ... you will have $60





Here's the best part ...




your hourly rate is $100.
it takes you 50 hours to install the pool



that is $5,000.



Some of you, I think ... would have taken your project cost and added on your HOURLY rate.


Which would look like this:

$40,000 + $5,000 = $45,000


You would have spent $40,000 .... and made a gross profit of $5,000



AT THAT RATE ...


$200,000 divided by $5,000 = 40


This means, if you were to charge your hourly rate, for the amount of hours it took to install ...

You would have to install 40 pools a year.



This is exactly what you have the capacity to do. Remember ... 2,000 hours in a year ... 50 hours per pool ... 40 pools.











Point is ... will you break even after 40 pools ... or 10 ???

Your market and your competition will decide that. You have to get a sense for that.


What is the highest gross profit you can earn on top of your project cost? The higher the number, the lower amount of sales it will take to break even and begin earning PROFIT. (just be sure to set some of that aside for taxes ... hehe)



Now ... you yourselves will know what your market tolerates ... whether it is a $5,000 gross profit ... or a $20,000 ... or a $200,000



if you're still confused:


$40,000 x 50% = $20,000 ...... revenue of $60,000
project cost x whatever markup = gross profit ....


$40,000 x 20% = $8,000 ... revenue of $48,000



play with it ... let me know what is clear and what is not ... again ... im not preaching gospel here.
 
See less See more
#2 ·
(your in-house labor, i.e. employees are included in your overhead).
No, that's wrong, and it kind of messes up the rest of it, doesn't it?

You should work out how much total labor (including other employees) is available in a year, then your total overhead, then divide the overhead by the billable hours (all of them, not just yours). That, added to your direct labor costs, gives you you labor rate.

You can quickly see how having more employees means that you can cover your overhead with a lower labor rate (you don't necessarily need to pass this on to the customer, you should alway bid based on the value of the job if that is higher)

John
 
#6 ·
Ok ... let's see if I understand what you're saying John ...



If I have that $200,000 overhead

and it costs me $30,000 to have one employee

and I have 3 employees - that is $90,000 I will be paying in a year

(and then there's me - but my salary is included in that overhead) - so 4 guys

ok - im getting it ---


4 guys ... 2,000 available hours = 8,000 available hours


290,000 divided by 8,000 = an hourly rate of $36.25




hmm ok --- i think (if I just went through this right) i see what you're saying.


$60,000 project
$40,000 variable costs

50 hours to complete ... hourly charge of $36.25
4 men


4 x $36.25 = $145


and here's what it looks like doing it my way

$290,000 (3 additional employees + me)

divided by the total hours in a work year (2,000)

290,000 divided by 2,000 = $145


so it works out the same???
 
#7 ·
Dirt


There are a number of faulty reasonings in your last post



I am going to have to think how to explain it to you



Maybe you would like to have another think about it in the meantime



Looks like I've got some key bounce on my 'enter' key too


Talk to you later


John
 
#8 ·
Dirt-
I always figgered that if I could charge twice as much as I do, and only end up getting 1/2 the work I get, I'd be WAY ahead, 'cept I guess more time to spend the same amount of $.

I try to charge as much as the market will bear, and maybe a little more.
 
#9 ·
certainly!

it's what the market will bear


Forry (and anyone else)


It takes me $40,000 to install a standard fiberglass pool

i have an overhead of $200,000


will you buy that pool for $240,000??

Cuz if you do --- great! I can break even after one project --- yours

But you won't buy it. Because Jo-Blo will come in and say "I'll do it for $50,000" or Hank the Poolman will come in and say "I'll do it for $60,000"


so, being at 240,000 - as a revenue price - I am far too high obviously


being at a revenue price of $40,000 - I am far too low because I will only break even ON THE PROJECT - but fail to pay any overhead


being at $45,000 ... I am the lowballer (if Jo-Blo and Hank are charging 50 or 60) --- but stand a chance at getting the job, right?


However, since I only have the capacity to install 40 of them in a year -- at 5K gross profit - I will only break even at the end of the year.

I will never make a true profit ... 40 installs ... $5K each = $200,000


This is also shows how just because you are "busy" ... does not mean you are making any money
 
#10 ·
Dirt, are you sure that the market controls how much you can charge for your goods and services? Is a 20x40 pool a 20x40 pool and should the price be the same since the client will end up with a 20x40 pool?

I do not know the pool industry nor do I know your market but here is some food for thought;

Window installations in my area go from $175 each (labor &material) all the way up to $1200 each. In most cases you end up with a window that goes up and down, tilts in to clean, douple pane, has a warranty........... If you transfer these numbers to a house with 20 windows you end up with a project that varies from $3500---$24,000!

If you look at the list of the top 100 companies by sales volume, you will find one of the $175 companies and the $1200 company both on the list, I believe that they both are in the top 50.

Granted windows and pools have very little in common but the concept is control your overhead, control you price and take your market share.
 
#13 ·
I am not a fan of dividng my overhead by hours. No, instead I prefer to divide my overhead by days and by average crews per day. The only time I use an hourly variable for overhead is when I am working T&M. There are many reasons for this, but let me try to explain.

I MUST generate (using last years numbers) $750 per day after labor and material, just to cover my over head. It doesn't matter if I have one or 10 employees or subs out working. It doesn't matter if the hours worked =10 or =200. I must generate that number!

If I had my hours marked up for overhead and didn't work enough hours, I wouldn't break even that day.

Your best bet to figure all this out is to sit down with your accountant. Give him your books and ask him what your daily, or hourly, overhead variable is. Also ask him to help you formulate your pricing to reflect this overhead variable, plus your desired overhead.

YOu can mark up hours, days, or trucks. It doesn't matter, I just find markuping up the days to be more accurate for my scenario. One side note... Labor burdens are directly marked into hours.
 
#18 ·
my profit --- no

the owner draws that I will use to pay my monthly bills and food and haircuts, ---- yes, that is included in that overhead

my personal bills need to be paid just like my business bills need to be paid.




one thing that might help rusk (cuz I think you've got the jist of what im sayin - judgin by your question)


you cannot make a true profit until you break even


you cannot break even until your overhead has been paid
 
#21 ·
I believe that this is a record for one of the longest posts. I could have written an entire proposal worth big $$ in the amount of tme that it took you to publish that.
 
#27 ·
but why is 20% fair? why not 50%? 100%?

McDonalds works on a 22% NET profit (that's after everything, including a $200,000 salary for the owner) for slowly killing us

Adult websites work on 40-60% NET profit for showing us naked people

Look into a company called "Rock and Republic Jeans" - the guy that started this company has spent about $4mil on cars in the last year or so. I don't know what their profit % is, but they are retailing at $200 for a pair of jeans. Why are they better than $30 levi's?

I think we have mindset in this industry where we don't give ourselves enough credit or feel that we are worth anything.
 
#29 · (Edited)
That's like asking me how much do I make in a year

so I can't tell you that, or don't want to at least



I CAN tell you this though ...

an overhead of $200,000



180 billable days (cuz the seasonal factor, right)


means really having 1440 hours (real time hours)
to break even on 200K


means in the least, your hourly rate each day would be $138.88

(and a capacity for only 36 sales - assuming that it takes you 40 hours to complete one. If you can do it in one day - you have a capacity for 180)

let's still say one week ... just to keep it simple



1440 hours divided by 40 = 36



ok ...



an hourly rate of $138.88 x 40 hours
= $5,555.20


ok ... a gross profit of $5,555.20

meaning you need 36 sales to break even in 2007

great - you get a sale on March 15th ... only 35 to go


you're done on March 20th .. 5 days later.

But now ... you don't get another sale until April 15th.

That is roughly three weeks (15 working days -- or 30 in pool land) that just went by without work


you are all of a sudden ... approximately $16,665.60 in the HOLE FOR THE YEAR


see what just happened?? (ask if you do not)



how are you going to make up for that $16,665.60???

You cannot get those 3 weeks back in "real time"


YOU CAN --- get them back in your gross profit.

Now your gross profit MUST be at least $6,031.36

JUST to break even
 
#30 ·
Hi Dirt,

I have to go over again what you have posted, but would like to comment that I appreciate your time that you put into this and I think that it is critical to know the financial numbers and the bottom line.

Right now my bottom line is I got to get to work.

Thanks for the efforts.

Bruce
 
#31 ·
Thanks for those comments Tonkadad

I know it's long and drawn out ... much of the time I was thinking out loud ... it's how i figure things out

In reality ... it took 60 minutes to type

(maybe 60 minutes to read on your part)



But takes 60 seconds to put to actual use:thumbsup:
 
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.
Top