624: Trading For Sales Vs. Trading For Profit In the Construction Business

This Podcast Is Episode 624, And It's About Trading For Sales Vs. Trading For Profit In the Construction Business

Times were tough, so Remodeler John decided to lower prices below those of his competitors. He promoted a charge-out rate 20% below the industry average, explaining that his overheads were lower than those of larger companies.

 

The turning point came after advice from his mentor. "You're selling yourself short, John," said the mentor. "With your qualifications and experience, you should charge at least as much as other businesses – if not more. I understand your marketing strategy, but I don't think clients see it that way. They are more likely to interpret lower costs as lower value and quality. In your industry, confidence goes a long way, so you shouldn't be afraid of marketing yourself at a price that reflects your expertise and experience."

 

Then came the call from his accountant. "Aren't the sales figures great?" said John, getting his bit in first. "Yes," said the accountant, "impressive sales indeed. That's the good news. The bad news is that the business has actually lost money over the last quarter."

 

This was how John learned that trading for sales and trading for profit could be different. Chasing sales revenue is fine, provided your prices give you a sustainable profit. John hadn't checked his costs for some time, so the unwelcome news from the accountant came as a shock.

 

In the construction industry, business strategies can vary significantly, particularly regarding the goals of trading for sales versus trading for profit. Understanding the distinctions between these two approaches is essential for contractors and construction businesses aiming for long-term success.

 

Trading For Sales

 

Trading for sales focuses primarily on generating revenue and increasing the volume of work undertaken. Businesses adopting this approach often prioritize:

 

1. Volume Over Margin: The goal is to secure as many contracts as possible, even accepting lower profit margins. This strategy can be beneficial for establishing a market presence and building a portfolio of work.

 

2. Winning More Contracts: Construction companies may aggressively bid to win contracts, often underestimating costs to make their proposals more attractive. This can lead to an immediate revenue influx but risks squeezing profit margins.

 

3. Short-Term Focus: While generating sales volume can provide immediate cash flow relief, it may divert attention from long-term sustainability and profitability.

 

4. Increased Risk: Accepting low-margin projects can expose businesses to more significant risks, especially if unforeseen costs arise or projects exceed budgets.

 

Trading For Profit

 

In contrast, trading for profit emphasizes the importance of maintaining healthy profit margins and sustainable business practices. Key aspects of this approach include:

 

1. Cost Analysis: This strategy involves thorough cost assessments to ensure all expenses are covered, and a reasonable profit margin is included in pricing. It prioritizes profitability over sheer sales volume.

 

2. Selective Contracting: Businesses may focus on projects that align with their capabilities and offer the best profit potential rather than simply accepting every available job.

 

3. Building Long-Term Relationships: Trading for profit often emphasizes forming relationships with clients based on trust and quality of work, leading to repeat business and referrals rather than one-off contracts.

 

4. Investment in Quality: By prioritizing profit, companies can invest in high-quality materials and skilled labor, enhancing their reputation and leading to better long-term outcomes.

 

Finding the Balance

 

While the two strategies may seem mutually exclusive, many successful construction businesses find a balance between trading for sales and trading for profit. Here are some strategies to consider:

 

1. Diversified Projects: Secure a mix of contract types—some aimed at building sales volume while others focus on profitability. This allows for stability and growth.

 

2. Efficient Operations: Improve operational efficiency to reduce costs without sacrificing quality. This can help improve profit margins while still being competitive in bidding.

 

3. Data-Driven Decisions: Utilize accurate bookkeeping and financial analytics to guide decisions. Understanding past project performance can help inform future bids and strategies.

 

4. Building Value: Shift client perceptions by emphasizing the value of your work rather than just the cost. Clients who recognize quality and reliability may be willing to pay a premium.

 

How Construction Bookkeeping Can Help You Avoid Selling Yourself Short And Price Your Services Competitively

 

Accurate bookkeeping can distinguish between thriving and surviving in the competitive construction world. Many contractors struggle with pricing their services correctly, often leading to undervalued projects and lost profits. Here's how effective construction bookkeeping can help you avoid selling yourself short and ensure you price your services competitively.

 

Understanding Your Costs

 

One of the primary benefits of bookkeeping is gaining a clear understanding of your costs. This includes direct costs such as materials and labor, and indirect costs like insurance, permits, and overhead. By tracking these expenses meticulously, you can gain insightful data about your actual costs, allowing you to create a pricing strategy that accurately reflects the value of your services.

 

Improved Project Costing

 

Construction bookkeeping involves detailed project costing, which enables you to evaluate how much time and resources are spent on each project. Analyzing past projects can identify cost overruns or savings trends that inform your future bids. Knowing the real costs helps ensure you're not underbidding your work, allowing you to set prices that fairly compensate you for your effort and expertise.

 

Cash Flow Management

 

Effective bookkeeping helps you manage your cash flow effectively. By keeping tabs on income and expenses, you can avoid the pitfalls of cash flow shortages that often plague contractors. A healthy cash flow allows you to invest in quality materials, hire skilled labor, and cover unexpected expenses without compromising future projects. This financial stability strengthens your position when pricing your services.

 

Competitive Pricing Strategy

 

With accurate financial data at your disposal, you can analyze what competitors are charging for similar services. Understanding the market rate allows you to adjust your pricing strategy accordingly. Comprehensive bookkeeping gives insights into deciding whether you compete on price, quality, or unique services.

 

Financial Insights for Growth

 

Detailed financial records provide insights not just for pricing but also for long-term growth. By assessing the profitability of different services or projects, you can strategically focus on the most lucrative areas of your business. This means you can price your services to reflect the value of your unique expertise and position yourself competitively in the marketplace.

 

Final thoughts

 

The trade-off between sales and profit is a critical consideration in the construction business. While generating sales volume can boost short-term revenues, focusing on profitability ensures long-term sustainability and growth. Striking a balance between these two approaches allows your construction company to thrive in a competitive market, optimizing revenue and profitability for lasting success.

 

Accurate construction bookkeeping is vital for ensuring you don't sell yourself short. Offering a clearer picture of your costs, optimizing project bids, managing cash flow, and formulating a competitive pricing strategy empowers you to price your services competitively. 

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or [email protected]