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How to distinguish Employees and Contractors

August 1, 2019

How to Distinguish between Employees, Contractors, and Subcontractors

A baseline concept in Profit First is for the owner to have the clearest picture of all business operations from largest to smallest. And, the bookkeeping should be done in such a way as to avoid confusion within the Profit First method. For example, in a skilled trades, service based, business, it is important to distinguish between employees, contractors, and subcontractors. First of all, how do you decide which is which and then, why does it matter within Profit First?

Subcontractors, Contractors, and Employees

You may have several people working for you on a project but not all of them will be employees. Some specialized jobs may require part-time subcontractors who are not your employees. Likewise, if you have taken on a job that requires more workers than you employ, you will subcontractors to get help. Again, these folks are not your employees.

A part-time employee who gets paid per job is a contractor or subcontractor.

Any employee who is paid per project is also a contractor or subcontractor.

All others who are working full time and are not hired just for one specific job are employees. Why it is important to know this is because of the calculation of REAL REVENUE.

Subcontractors, Contractors, and Employees
Subcontractors, Contractors, and Employees

Real Revenue versus Total Income

The value and size of your business are based on how much money you make as well as your assets. We generally think of Total Income as the “bottom line” or just how much you make. But, Total Income can be misleading in a skilled trades business like HVAC, electrical, or plumbing. When materials, contractors, and subcontractors make up more than a fifth (20%) of your business, you need to take a different approach.

Real Revenue is Total Income minus the sum total of contractor and subcontract payments as well as materials. This calculation will give you a better idea about the size and value of your business in cases where you use lots of subcontractors and lots of materials.

Determining the Size and Scope of Your Business

It can be easy in your busy electrical, plumbing, or HVAC business to see large amounts of money flowing through and to think that your business is very large and very successful. But, a lot of that money is not yours! Your business may be significantly smaller than you thought if much of that cash flow is going to pay contractors and subcontractors and to purchases materials for various jobs. To get and maintain a clear picture of this situation, your bookkeeping system needs to use the Real Revenue calculation instead of just showing you total income every month.

Take look at our YouTube video about the difference between Total Income and Real Revenue.

Because not every skilled trades business uses lots of materials or routinely subcontracts, you may not need to do this calculation. Folks who are new to the Profit First method should be working with a Profit First Professional to learn specifically how to do this. Because Profit First can be so important to your business profits and success, you need to work with a professional to get it right the first time.

If you have questions about how to use Profit First in your skilled trades business, schedule a meeting with one of our Certified Profit First Professionals now.

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Small Business

Running a small business can be very rewarding and profitable. And, running a small business can be difficult as you deal with all of the details. In our Small Business section our aim is to help you put things in perspective, learn to do the most important things first, and find the hidden costs that sap your profits and your strength. Small business sales can be strong but your small business profits may not be. Read our articles in this section for help in avoiding small business pitfalls and realizing growing profits.
Profit First helps you experience profit.