You Work Hard to Make It. Where Does It Go?

What owners actually keep

In most industries, what a business keeps after paying its owners a fair salary is a few cents of every dollar a customer pays. Everything else goes to the people, materials and overhead it takes to deliver the work.

That is why a small slip in costs matters so much more than it looks. When a business keeps only a few cents of each dollar, a leak of a cent or two is a large share of what it keeps.

Four numbers show where the rest goes

You do not need forty ratios to see where your money goes. You need four, and they are already on your profit and loss statement:

• Direct costs. What it costs to deliver what you sell: materials, subcontractors, the crew or kitchen labor, the goods you resell.
• Gross margin. What is left of each sales dollar after direct costs. This is the money that pays for everything else.
• Overhead. Everything it takes to run the business that is not tied to a specific job or sale: office staff, rent, insurance, software, vehicles, fees.
• Total profit. Gross margin less overhead. What you keep.

Each one, as a percentage of sales, can be put next to what the best operators in your industry run. That comparison is where the answer starts.

Where it usually leaks

After years of reading owners' statements, the leaks I see fall into three patterns.

Direct costs creep up quietly. A supplier raises prices a little at a time. A job runs a few extra crew days. A change order gets done and never billed. None of it shows as a problem in any single month, but gross margin slides a point or two a year.

Overhead grows in small pieces. A software subscription here, an insurance rider there, card fees that rise with sales, a hire made for the business you hoped to have. Each one made sense when it was added. Together they become a bigger share of every sales dollar.

Prices lag costs. Many owners set prices from last year's costs. If costs moved and prices did not, the margin went to your suppliers and your customers.

What the gap looks like in dollars

Take a contractor with $1.5 million in sales. Every point of margin on those sales is $15,000 a year. The gap between a typical operator and the best operators in the same trade is several points, and it comes from the same work, the same customers and the same hours.

That gap is money you already earned. The question is how much of it is sitting in your own numbers, and which line it is in.