What is your Profit Margin?

Discussion in 'Business Operations' started by landscaper22, Nov 9, 2007.

  1. landscaper22

    landscaper22 LawnSite Senior Member
    Messages: 845

    What? If you are a sole proprietor, your profit is your pay (personal taxable income.)

    Let's just pretend this thread was never started...It has gotten to be way too far out in right field, and some are reading too much into it! :cry:
  2. YardPro

    YardPro LawnSite Gold Member
    Messages: 3,570

    definition of profit........
    2. The return received on a business undertaking after all operating expenses have been met.
    1. The return received on an investment after all charges have been paid. Often used in the plural.
    2. The rate of increase in the net worth of a business enterprise in a given accounting period.
    3. Income received from investments or property.
    4. The amount received for a commodity or service in excess of the original cost.

    you miss the whole meaning of what the word profit means. Unless you work for free your pay is a business expense.

    if you do not work at all in the business then your income can be generated from the business profits.
    but if you work in the business then your pay is a cost associated with the production of the services you provide your clients, thus it is an expense. Profit is AFTER ALL EXPENSES.. this includes your pay.

    i am not trying to be argumentative, but I do want everyone who reads this to understand what profit actually is.

    As a sole proprietor you do carry tax liabilities for all the earnings of your company. BUT if you consider profit and your pay one in the same then how can you claim to have a 59% profit???? There is no profit, because whatever is left is payroll. the assumption you make assumes there is NO profit, since the entire earnings of your business are your pay and therefore not included in profit calculations.

    with your statement, what you really said in the original post was that your operating costs without labor burden are 49% of your gross.

    i know it sounds trivial, but there are very critical distinctions when figuring profit. it is these distinctions that will make or break a growing company.

    FCPWLLC LawnSite Senior Member
    Messages: 352

    Entreprenuers think differently than employee minded folks. Some have invested in a business and others have only bought a Job.

    Yard Pro is correct here. This isn't for argument but rather helping a brother succeed. As long as you think you are working on 59% margins while the rest are working on 10-20%, you will find things rough in time. It's hard to make adjustments when you are working with false numbers. Also, when trying to compare numbers with other Businesses in your field, you need to be on the same page when defining expenses and margins etc.

    The original post was a good question as you were trying to determine where your Business stood compared to others in your industry. However, if your profit isn't based on business standards that are commonly used then it is hard to compare. Example... My business is running on about a 9% margin. Compared to your definition of margin it would appear that your biz was fairing better than my own. However, my numbers are based on myself drawing a $80k/yr salary. If I included my salry in profit, I'd be at 80+% margins.

    Make any sense?
  4. haybaler

    haybaler LawnSite Senior Member
    from ma
    Messages: 511

    I see were your coming from and your textbook correct but real world wrong. What do you base your salary on?? all employees generally speaking on average are paid the same, but one guy here is taking 50g and another 80g you could change your profit margin by a big % just by changing your salary. your exactly right though in saying "Some have invested in a business and others have only bought a Job." there's a big difference in numbers depending if your actually out there doing the work or you just have money investing a a big company that runs itself.
  5. landscaper22

    landscaper22 LawnSite Senior Member
    Messages: 845

    I do in fact see the different points that each of you have made. I really did ask the wrong question when I asked for profit margin. I do understand what profit margin is, and it is an important number for a business owner to know about his/her business. But when I posted this thread, I wasn't thinking about how that percentage can vary so easily. I also do understand that just because you have a profit margin of 20% that doesn't always mean it is a bad thing.
    What I would like to know is especially for the LCOs that gross near or over $1 mil each year, does it get to the point where an unreasonable percent of that gross is spent on basic expenses? Now follow me here...
    I'm not talking about paying yourself a salary, and I'm not really talking about making a large investment that may skew your numbers for one year. I am just saying if you run like 8 crews, and with all 8 trucks, trailers, Zs, handhelds, fuel, ins, worker's comp, employee salaries, employee tax, and other basic overhead like maybe a shop, and all the utilities you pay for it...do you really make much priofit for the business.

    I was curious as to if the headaches that come with being a larger LCO are worth the extra $$. Or do you reach the point where it is not really worth any more growth because 90% of the gross you make from each crew goes to paying basic operating expenses and overhead?? I just want to compare it to say a smaller LCO like myself with a gross of between $75-100K, working out of home with less overhead. See what I mean? That's all I am after really. Do the benefits out weigh the headaches?

    FCPWLLC LawnSite Senior Member
    Messages: 352

    One of the best ways to determine salary is to figure what you would have to pay someone else to do the same job(s). How much would you pay a Manager, advertising rep, payroll proccesser etc..?

    Think about it... most of us oversee the actual work, some of us DO the work AND run all the needed errands. We develop marketing plans, pay bills, schedule work, hire and fire employees, deal with Tax Man, deal with Un-employment and WC audits. The list goes on and on. WHat would you have to pay someone else to do these things?

    I draw $80k because I am wearing several hats. I manage AND do quite a bit of the work also. If I take a step out and hire another employee to do the work, then I re-evaluate my Salary. Either way, keeping a focus on expenses and profit are constantly done.

    FCPWLLC LawnSite Senior Member
    Messages: 352

    Most folks I know do better staying at the smaller business level. When some take on more accounts and crews they see more headache and less profit. I suppose it depends on what your goals are. If you want to make more money, you almost have to increase Gross dollars no matter what your margin is. Do a comparasion to increased volume and low margins versus staying small with a higher margin. At some point you will see a break even and then start to see a number where you make more with the higher volume/lower margin.

    Yard Pro can probably give better examples of real world LCO numbers than I can since I Pressure Wash and have WAY different margins. Yard Pro Chime in...?
  8. muddstopper

    muddstopper LawnSite Silver Member
    Messages: 2,341

    My company is incorporated. I look at profit as anything left after everything is paid. I might be in a unique position in that I dont take any salary or pay from my company. I do collect dividends off of the company profits. Its a long story why I do it this way, but it boils down to protecting 30+years I already have invested in a seperate retirement system.

    Taking my salary as dividends isnt something I suggest everybody do, you get killed in taxes, but it doesnt break my working relationship with my regular employer, and therefore doesnt effect the amount I can draw off my pension.

    Normally, one would consider any money profit only after they had deducted their salary and all other expenses. Otherwise, if you have a unexpected expense, it would come directly from your paycheck, meaning this week you might have to settle for hotdogs, instead of steak.

    One thing I try to do is take 10% of gross on every job and deposit it in a seperate account for emergencies. We markup all materials and labor at 28% on larger jobs. We use flat, take it or leave it pricing on the smaller jobs.This has worked pretty good the last few years leaving us with around a 26% profit margin after everything and everyone is paid. This year because of the slowdown in the houseing market, we are just barely breaking even and I have had to adjust my markup. We are doing fewer jobs, but higher dollar amounts. Labor cost is whats killing the profits this year. The last few years, it hasnt been any problem keeping eveyone busy, this year I have ended up paying employees when we werent produceing income. My son is lead man and draws a salary, rain or shine, work or no work, he draws a check. My wife runs the company, and always draws a check, everyone else, is part time, but its hard to motivate someone if they aint getting 40hrs a week. I am gone during the week so I dont contribute labor except on weekends, and only then if necessary. I dont work the weekends so My employees have work during the week. Everybody is getting paid, but there isnt much profit left this year.
  9. Az Gardener

    Az Gardener LawnSite Gold Member
    Messages: 3,899

    This is an excellent thread and I hope you are not sorry you brought it up. Sorry if I was a little chippy before but the words we use are the basis of everything we do.

    I am glad you cleared up what your real questions are. I do about 500-K now and we are way under employed for our structure and employees I am looking foreword to getting much bigger.

    With that said I was partners in a much bigger company and it was a drag. I didn't enjoy the work nearly enough and was embarrassed by at least half of the employees. The product we produced was good but it was very stressful because we did not have any systems and did most things by the seat of our pants so to speak.

    If you are running a well planned company it can be very enjoyable and profitable and yes it is worth the money in my opinion. The key is do you have the interest in building a business or do you enjoy doing the work because they are two very different animals.
  10. landscaper22

    landscaper22 LawnSite Senior Member
    Messages: 845

    Thanks FCPWLLC & mudstopper. You both have made great points.

    One thig that really stands out to me is what FCPWLLC said about how much is would cost you to hire someone else to perform some of your duties....That is one of the things that concerns me most....Being funny althought it is true, I posted a thread about the many job titles of business owners a few days ago. The smaller the business the more hats you wear. You are pulled in several directions sometimes in the same day. At the same time when you hire someone to take over some of that responsibility, you open yourself up to a new set of problems.
    Part of me really wants to grow. I look to some of these larger LCOs on lawnsite as well as the largest LCO in my area as inspiration and motivation to continue my push to become larger. The Largest LCO on my area has ownership that is shared by 3 individuals, and it once was 4. One sold out his portion to the other 3. This LCO, I have heard, is one of the largest in the southeast. I can believe it. I don't know how many employees they have, but if I had to guess I would say 100-125 if not more. So when I need inspiration, I don't have to look very far.
    I am just worried that by hiring someone to take some of my hats off so to speak would cost me more that it is worth. Now I don't mean hiring a helper...I have worked plenty of helpers. I've been through about 10 of them in 2 years...90% of them are helpless and can't even do the basics without lots of hand holding....
    But, If you consider how much it takes to live, you would have to pay someone at least $25-30,000/year in my area (which has a lower cost of living compared to many areas) for the individual to be at a wage that is good enough to make a living and have any extra. If I pay that kind of money you better be able to move mountains. But even that is not a great wage. Just average. But the employee will cost much more than just the salary. After our dear Uncle Sam puts a gun to your head and tells you to pay up, and worker's comp, unemployment ins, extra general liability ins, holiday pay, vacations,and any other benefits you may offer, well there goes your profit.
    Sorry about the boring rant. I'm just trying to make some serious decisions about the future of my business. I would love to be running 2-3 maintenance crews and have one dedicated crew for landscaping. But if the numbers are going to go down the drain, then I can stay small too.

    Thanks, to everyone for the input here. I wasn't expecting the different types of responses I got, and I guess I have now even taken this in another direction myself, but hopefully others will read this thread and think about all that was said. Great stuff!

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