Get Roasted. Learn your Numbers.Jan 10, 2023
From the desk of Toby:
When I was in business for myself and I was approached about doing work that I had never done, I went to social media groups to find other people doing the work that I needed to quickly learn how to do. What I realized after a few times was that I could figure out how to do the work on my own if I just ignored the noise and put my thinking cap on. I had enough knowledge to get most any job done, I often lacked the confidence to try the first time. What I realized is that I often felt completely in the dark about pricing. So I would go look for pricing parameters. Obviously... This was before the good ol’ Rebel days, and before Restoration Nation; communities that fostered growth and knowledge sharing. So naturally I got more roasted than I got good information.
These were good though. I used "roasting" to pause, take a step back, and look at the truth in the comedy, albeit at my expense. I took a stop back and realized that I needed to develop my own process from start to finish. My biggest shortcoming was the numbers. I needed to learn how to put my own pricing together and not rely on a 3rd party (voice, software, or otherwise)
Know your numbers
I had to know my numbers based on my operating costs and job costs, my geographic location and what my clients wanted. I failed to realize early on that every company is different (Full transparency… I barely made it through accounting in college. It took a school of hard knocks to grasp the concepts of real world accounting).
There is no estimating software in the world or person in the restoration industry that can tell you what your numbers are.
The same way that there is not another person like you in this world… there is not another person, software, company, or entity in this world that can tell you what you should or should not charge.
Using some information from the book Markup & Profit by Michael C. Stone (you can find it in our Book Vault), we’ve put together the following definitions and cited the location should you choose to get the book yourself.
We are putting together a workshop with some resources to help you figure out what your business needs so you can know your numbers. More on that below.
Overhead Ranges You'll note that the overhead in the charts ranges from roughly 15 to 54 percent. That range should convince you that no single markup figure could possibly work for all companies. And notice that these figures are in direct contrast to the myth that a contractor can operate on 10 percent overhead and 10 percent profit (Page 33)
Overhead, by definition, is all non-job-related expenses. Any expense that can be traced to two or more jobs is an overhead expense. No two contractors will have the same overhead expense. They'll always have a different number, regardless of the volume of work they're doing. (Page 34)
There are two types of profit, gross profit and net profit. Gross profit is what you have after paying all your job costs, but before paying any overhead expenses. Don't get too excited about gross profit - you still have to pay your overhead expenses. You can calculate gross profit for each job, but not net profit, because you can't easily allocate your overhead bills to individual jobs. Net profit is what's left after all the bills have been paid. Your net profit is the one that counts. The clearest picture of your net profit is on an annual basis. Overhead expenses vary from month to month, and sales can fluctuate throughout the year. But when you look at an entire year's worth of sales and overhead, you'll know the net profit for your business. So you see, gross profit and net profit are very different things. And here's an important point: net profit is not your salary, or what the owner should take from the company as compensation for owning and running the company. Net profit profit. Your salary is an overhead expense. More on that later.
Determining the proper amount of profit is a deeper conversation that is wrapped up in the subject of [[margin]] Both types of profit, gross profit and net profit, are dollar amounts. When we talk about profit, we're talking about dollars. (Page 19)
Job costs are all direct job-related expenses. An example of job cost would be rolls of poly for containment, a fan or dehu, PPE, or chemicals. Job costs also include the labor necessary to perform the job. If equipment is rented for one job only, it's a job cost. If it's rented for more than one job, it's an overhead expense. In some cases the rental can be split among multiple jobs. Job supervision is always a questionable area. If your job superintendent works on only one job at a time and his payroll can easily be applied to that job, then job supervision can be a job cost. But generally, job supervision is an overhead expense. (Page 18)
If you get started with Overhead, job costing, and profit... and get confident with those on a job level, you’ll be well on your way to profitability.
By knowing these numbers, pricing up front will get easier and confidence will come. When you know your numbers, and you properly OnBoard your customers from the first phone call, the noise of outside voices will get more distant and you'll be able to operate with an independence that has propelled other restoration professionals to incredible cash flow and profitability.
I had to know the fundamentals, but I had to figure out the best way to do the job based on my tools, skills, and location.
We are putting together some worksheets to help you figure out these numbers. Join our community (Restoration Nation) to stay up to date on the latest projects and resources as they become available.
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