Ruth King
Contributing Writer
Profitability Revolution Paradigm

“You can’t take a percentage to the bank” is one of my favorite lines. Here’s why:

Contractors boast (or complain) about their net profit percentage. Reality is that the net profit percentage can fool you or lull you into a false sense of security.

For example, two contractors earn 20{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} net on their businesses. You might think that is great.  However, 20{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of WHAT?  If it is $10,000,000 then this contractor earned $2,000,000 profit. If it is $1,000,000 then this contractor earned $200,000.

The next question to ask is – did you collect 100{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of your sales?  If the contractor who grossed $10,000,000 only collected $8,000,000, then only $1,600,000 of the $2,000,000 profit got turned into cash. Yet, he gets the privilege of paying taxes on all $2,000,000 – even though he didn’t collect it all!

The real question – that evens out all of the percentage hype – is what was your net profit per hour?  For every hour your company produced work, what was the bottom line – how much did it earn in net profit?

Calculate this answer by taking your company’s net profit and dividing it by the total number of revenue producing hours (no overhead hours).

If you had a loss in 2017, you paid your customers to do their work!

Let’s take the $10,000,000 contractor. Assume that his direct payroll hours were 100,000 hours. His net profit per hour was $2,000,000 divided by 100,000 or $20 per hour.

Let’s take the $1,000,000 contractor. Assume that his direct payroll hours were 6,000 hours.  He earned $33.33 per hour. The $1,000,000 contractor was actually doing better, from a net profit perspective, than the $10,000,000 contractor.

So, calculate your net profit per hour. Are you really doing well?