Real revenue is a bookkeeping category that businesses should use if they have substantial expenses from materials or subcontractors. Folks in construction trades from builders to plumbers, electricians, and brick and cement workers all need to consider this approach. The problem that many of these businesses face is the fact that much of their business is managing costs equal to or greater than their own work. First, we have an example and then some thoughts about how businesses using subcontractors and materials can realize profits.
Our hypothetical electrical contractor in the Kansas City area, Bob, has a total income each year of $150,000. And he subcontracts work to the tune of $40,000. Plus materials cost $45,000.
So, if we apply the real revenue approach to Bob’s total income we get this.
Minus $40,000 (subcontractors)
Minus $45,000 (materials)
So, Bob has a $65,000 business and not a $150,000 electrical contracting business. What he does is manage $85,000 in materials and labor which is in excess of the rest of his business.
But, does Bob take home $65,000 minus taxes? The answer is no.
These are Bob’s other costs of doing business.
Cost of Vehicles, $13,000
Take home pay, $25,500
However, the average wage for a journeyman electrician in the Kansas City area is $26.85 an hour. This comes out to $1,074 a week and $53,700 gross pay for a fifty week year.
Considering that the union job may well include health benefits and even a 401(k) for matching retirement savings, Bob could be doing better as an employee, albeit a union electrician.
How can Bob fix this situation?
The materials that Bob uses and the subcontractors that he pays account for more than the rest of his income and expenses. Bob need to separate this out by subtracting materials and subcontractors from his total income. Then he needs to take a long and hard look at the jobs he is taking,what he pays for materials, and who he is paying to do subcontracting. All too often people with great skills in their trade do not have great bookkeeping,accounting, or business skills. Bob needs to sit down with the Profit First Professionals at Exigo Business Solutions.
The greatest advantage of the Profit First method is not taking a profit off the top. It is getting your financial house in order. When you identify the “elephant in the living room” such as subcontractor and materials expenses that are eating up profits you can start to deal with the situation. Using small business tools like QuickBooks and its Custom Reports, a business owner can spot problems and take action. If you have a situation similar to this one, contact the Profit First Professionals in the Kansas City area, Exigo Business Solutions and get back on the path to business profits.
If you still have questions or are interested in implementing Profit First in your business schedule a meeting with a Certified Profit First Professional today!