THE MAGAZINE FOR PROFESSIONALS

Is your profit margin too low? Here’s how to check.

by Brian Sodoma

Eric Belley spent time in the banking business before he became a painting contractor three years ago. The owner of North Atlantic Painting Company, in Florida, says one of the keys to his success is understanding how to maintain a good profit margin. Here, he offers some insights for how to get this number right in your business.

A P&L statement is critical

Every month, Belley reviews his company’s profit and loss (P&L) statement. Many contractors view this document as a formality come tax time. But for Belley, it’s the key to finding profitability and staying there.

“Too many business owners can’t interpret them and don’t even understand what’s in them. If that’s you, you need to talk to your bookkeeper, accountant or CPA,” he said.

A basic P&L statement includes three primary elements: gross revenues, cost of goods (labor and materials), and operating expenses, which can include licenses, registration, advertising, rent, technology, and anything else it takes to run an enterprise daily. With these figures, you only need a few simple calculations.

  • Gross revenues minus cost of goods = Gross Profit
  • Gross profit minus operating expenses = Net Income
  • Gross profit divided by gross revenues = Profit Margin

Figuring out if the margin works

In a simple example, if gross revenues equal $100,000, and you spend $40,000 on labor and $20,000 on materials, you have a gross profit of $40,000, and a 40% profit margin.

Ultimately, the goal is to increase net income. In the above scenario, if you factor in $20,000 in operating costs, you then have 20% of gross revenues left, or $20,000 in net income—and that’s a healthy net income for any owner, Belley said. So, in this case, the 40% profit margin is good. However, if the net income is not where you want it to be, then the profit margin isn’t adequate.

Which expenses are priority

When reviewing your P&L, you may notice your material costs can vary quite a bit. That’s why even a seemingly small savings can bring a significant profit margin and net income improvement.

“If I can reduce 1% of my materials costs, people tend to look at that as insignificant, but that’s an extra $1,000 you keep from your gross revenue in that $100,000 revenue example,” he explained.

Belley meets with his suppliers every four to six weeks. Anytime there’s a 5% cash-back bonus on purchases or even a 50¢/gallon reduction in pricing, he happily takes it.

“If you’re buying one product in high volume, you should be able to negotiate better prices. Meet with your rep regularly, and don’t be afraid to ask,” he said.

You must scrutinize your labor situation too. Are you overpaying for guys who aren’t producing enough? Are you underpaying but getting poor quality and dealing with callbacks?

Above all, Belley emphasizes the importance of scrutinizing these numbers monthly.

“It memorializes where you were at for a period of time each year and gives you benchmarks to measure against. Without that, you’re never really sure.”

For other business tips for paint pros, visit inpaintmag.com

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