Training & Education
Quoting profitably • Level Up, October 2019
March 4, 2020 By Andrew Houston
Do you quote jobs day after day but never stop to think, “Is this actually going to be profitable? How much money should I make?” And then the bid gets sent, the client accepts it, time moves on, materials change, you get called back to the jobsite multiple times and of course you still need to pay your suppliers. Does this sound familiar?
It’s important to avoid ending up like those contractors who never earn the profits they expect. And the key to knowing whether or not you will be profitable is all about leveraging the numbers.
Are you making enough profit to cover your fixed expenses? These business expenses, including leases, taxes, salaries and utilities, are not determined by your sales, but always need to be more than covered by them, to avoid bankruptcy.
What sales targets do you need to hit, to become profitable? It is essential to ensure you are bringing in enough work at the right margins.
What formula do you use? Out of 100 contractors I talked to, more than 95 of them were not calculating their margins correctly and it wound up costing them their shirts.
All of the information you need can be found in your profit and loss (P&L) statement with your accountant or bookkeeper. The simple formula you need to know is for your break-even point (BEP), as follows:
Fixed annual costs / (Estimated annual sales – variable costs) = BEP
Breaking even is defined as the point where sales or revenues equal fixed expenses. There is no profit made nor loss incurred at this point.
Now that you know how much of a margin you need to earn to break even and exceed to make a profit, here are your next steps.
- Filter fast.
Prioritize your sales leads based on ‘classes.’ Class A refers to clients you want to work with, whereas Class D encompasses those you would avoid at all costs. Once you’ve made this list, work with your sales team to develop a process and script for addressing each class of leads with bids and estimates.
- Put up a sales board.
Every opportunity that comes into your business is not the same, so again, prioritize them. Include their contact information, related notes and what ‘phase’ of the sales process they are currently in. This will help you know what’s coming in and plan your estimates accordingly.
- Separate your quotes.
This is another chance to prioritize items, but separate items according to level of difficulty—e.g. guesstimate to estimate to detailed final quote.
Andrew Houston is owner and founder of Profit for Contractors (PFC), an industrial controls licensed electrician and an electronics engineering technologist. He helps entrepreneurs in the skilled trades improve their business skills, so they can enjoy more control, freedom and money. You can also join PFC’s Facebook group, ‘Contractor Tips.’
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