Dispatch #77 - “What Kind of Company Are We?”

“What kind of company are we?”

A safe company would be an answer to be proud of. We’re taking extra precautions to keep workers safe.

A fair company, and a fun company to work for.  Those would also be good answers.

But turning to the numbers, are we a $1 million, $10 million, or $50 million company? Difficult to say because there’s pre-pandemic, there’s the shutdown period, there’s the Delta chapter, and then hopefully soon a post-COVID resurgence.

That’s the top line, but what about the “middle line,” gross profit? Are we a 20% gross margin company, 30% or 40%? In the well-run companies I work with, gross margins haven’t changed that much, despite COVID-related cost increases. A small change in gross margin is significant, so be thoughtful before redefining this aspect of the company’s financial model.

What has changed during the pandemic, from what I’ve seen, is that fixed costs -- Indirect and SG&A -- are creeping up: it takes more people in the office (including project managers and estimators) to bid and manage the same amount of work. Carry too much overhead and we push our business into the red; carry too little and we can’t deliver tomorrow’s expected revenue and its ensuing profits.

Continuing down the P&L, what kind of bottom line, net profit company are we? $500K, $1M or $5M? Which direction are our profits headed over the next year or two?

Finally, are we a 5% (of revenue) net profit company, a 10% or even a 15% contractor? All things being equal, a higher net profit margin is better because it generates the same dollar of profit with less risk: less work performed means fewer things can go wrong.

Where’s all this going?

With the quasi-tectonic shifts in the economic and construction landscape due to the pandemic, this is a perfect time for you and your leadership team to take stock and reconfirm your company’s financial model: revenue, gross profit margin, overhead, and bottom-line net income.

Know these numbers backward and forward. They’re your north star – the decision (model) that shapes a thousand decisions.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.