How To Know If Your Construction Business Is As Profitable As It Can Be

Even the most profitable companies can do better and actually make more money. Then there are the small businesses that seem to be doing well but could stand to make even more. Most small businesses fall into this category since there are ways for them to grow into big businesses.

The key is to know what you are looking at when you see your numbers. Profitability is one thing. Maxing out and scaling up the profitability is quite another. In this article, we will go over what to look for to understand where you stand when it comes to how much profit you are making in your construction business.

Know Your KPIs

KPIs are Key Performance Indicators and are essential for any business to understand. These are the numbers that you can look to and see at a glance where your profits are. These are indicators that can show you where there are opportunities for growth.

The KPIs that a construction business needs to know are specific to the industry so you’ll need to have a system to show you those numbers. A good construction analytics platform is essential to running a construction business on a lot of levels, but when it comes to distilling the metrics that your company is experiencing, there is no substitute.

Gross Profit Margin

Gross profit margin is a very simple ratio that is easy to understand and is one of the factors that need to be understood when determining how profitable a company is. It is the amount of revenue minus the cost of goods sold, the cost of labor, and the cost of materials. The result is the gross profits.

This is not the final number as it doesn’t include overhead expenses like rent or mortgage of the offices or the administrative costs associated with the entire operation. The gross profit margin is basically how much the company makes minus the cost of the projects that were completed in the business year.

Net Profit Margin

When you subtract all of the operating expenses and overhead from the revenue, you end up with the net profit margin. This is a ratio that puts a dollar figure on the percentage of sales. This percentage is how much of each dollar earned is actual profit.

This is a crucial number to understand since it demonstrates very clearly if the company is on the right track as far as profitability. Seeing this number will let you know how deep you need to investigate the other metrics to determine if you can be doing better.

Working Capital

The ability to pay short-term expenses that are necessary to complete projects is crucial for a construction company. The number that you need to know is the working capital metric. The higher this number is combined with a high net profit margin is an indication of the very strong financial health of your construction business. A large amount of working capital will make it impossible to grow as a business and make more money.