I know that there is a thread that discuss how much do you make. What I am wondering is what is percentage that a business owner should make at the end of the year. I will give an example. A general contractor makes $200,000.00 a year how much of that should be his actual gross income?
This is the second question. Is there any rule of thumb as far as how much a person would go up with their wages after gettting their GC license? Now I understand that there is many variables. I also understand that it depends on where you live etc. Just trying to get an idea what you all think about the questions I have. Again I appreciate any input here.
Tamara
Replies
Gross income is the total of your sales. Net income is your profit, gross less cost of sales and expenses. Most people use the gross income numbers when discussing their businesses, because they are bigger and easier to come up with. But the only number that has meaning is the net number. If it goes out as fast as it comes in you're working for nothing.
I'll let others advise on typical gross vs. net numbers in the building industry, as we are in retail. (Our retail net numbers typically run around 25% - 30% of gross.)
"A completed home is a listed home."
The previous post is correct. Gross is total sales or total revenue, but there is expenses that come out of that to leave a net. As someone that finances builders/developers, 20-25% is desireable, but is usually on the high side, and usually is only attained by property developers and commercial builders. Home builders might make 25% on a couple of deals, but their average is usually less. A lot of builders I work with show profit on their cost estimates of 12-15%, but there's places where they can bump that up, by also including a "supervisory expense" catagory, etc. Some depreciation can also be added back to the net income figure, then the total can be divided by the gross for a "true" net.
I'd have to say that my personal income is pretty gross. Does that count?James DuHamel
J & M Home Maintenance Service
"Southeast Texas"
I have to agree with James...my income was pretty gross too!
But seriously, obtaining a GC license would likley increase your salesprofitabilityearning potential (whatever you want to call it) basically because if you are in an area that requires permitting and inspections for larger jobs, you might be required to have a GC license in order to obtain permits for these jobs.
Hence, you can't secure larger jobs (i.e. more $$$) with being able to pull permits which in turn would require a GC license.
If it was me, I'd get the GC license. Even in Florida where we are licensing kings compared to the rest of the country, mine only cost about $1,500. to get (books, testing fees, etc) and requires just a few hundred dollars a year to keep active.
Too bad I can't sell you mine since I'm not using it anymore like they do with liquor licenses...
Mike
Mike,
You might want to consider, at a minimum, keeping your license viable by being on inactive status. Get your required continuing education and keep up with that every two years, also. If you ever decide you want back in to our rat race you'll be up to snuff. If you don't have this years hours on file in Tallahassee before the renewal mailings are sent out I was told you will NOT get a mailing and will probably get a violation logged against your number which will make it even harder to jump back thru the hoops.
Best to you in whatever you end up doing.
Ralph CGC058714
Ralph,
Hey, thats some good information. I didn't know that. I'm inactive right now and it expires in 2003 but I probably should be in touch with Tallahassee just to keep abreast of any new info like you mentioned. They are very unorganized as it is in my opinion so anything that makes it more complicated will just make it worse.
Thanks again Ralph.
Mike
Roucrumom was asking about "gross income" of the contractor as owner, not the annual sales of the contractor's business. Contractor's gross income as in before taxes he would pay on "his" income.
Use 10% of annual sales as the amount you should expect to pay yourself if a larger company, and that income would come in the form of (1) weekly salary, (2), quarterly distributions if it's a corporation, and (3) what ever part of the net profits to decide to take instead of using it for some other thing. However, if you were an one man operation, that 10% does not apply. For example, I do about $165K to about $180K annually and pay myself a salary of about $71,500. Since I'm a sole prop., I take the net profits as additional income, so as you can see, my salary is about 40% - 45% of total annual sales, but if you add the net profit as "additional income", that percentage increases accordingly.
Here's what's critical for 1-2 man operations. Your own weekly salary MUST be budgeted in as an overhead item, as it would be in larger operations. In other words, you do not work for wages. Wages are not the end result. They are just another overhead expense item of the "business."
Yes, in order to account for the size of the business (a 1-man operation compared to a 100-man company for example), you have to separate your "pay" from the gross and net margins. And if you're basing a PnL on "cash", then you loose the significance of asset growth, accumulated depreciation as yet unrealized, etc. If you cannot depend on revenue to pay yourself a salary, then consider paying yourself a commission. If you have a lot of assets (building, tools, machines, vehicles, etc.), then you may want to include ROA as a measurement too. Most small companies should be managing to cash, borrowing to ROA/ROI, and measuring to net margin. .
Phill Giles
The Unionville Woodwright
Unionville, Ontario
Interesting. May I ask some questions?
In retail, "margin" means the retail markup on an item. What does it mean in construction?
"accumulated depreciation as yet unrealized" Do you mean just the depreciation since the last time depreciation was posted to the Balance Sheet, or something else?
"If you cannot depend on revenue to pay yourself a salary, then consider paying yourself a commission." Could you explain further? Is this for someone who is carrying a large A/R?
What are the reasons an owner would term their pay "salary" as opposed to "draw" (or "commission" or whatever). I know that sometimes the way you take it has to do with tax classifications, or that you may not want to pay Workman's Comp. on yourself. But in the end, in the long run, you can't pay yourself more than you're making, right?
We're very conservative - all cash accounting, and draws are realized profits (only after the checks don't bounce!). I don't have experience running a business that has its own investments, has a large A/R, or regularly borrows money. Thank you."A completed home is a listed home."
Some of this depends on your business organization and where you live and pay taxes; and, if you ever intend to sell your business or hand it over to a paid manager. Next, how you pay yourself for planning purposes and how you pay yourself for tax purposes do not have to coincide, it's just a matter of keeping score. If it's a corporation, then you could pay yourself more than simple profit; because, you may have an offsetting asset growth (both capital and WIP) to use as collateral or could borrow on other value - for example, if you're building a group of spec houses, you could go 2-3 years with no cash to pay yourself unless you borrowed your salary from the bank (and you really want to pay yourself at least enough to leverage all of your deductions, social benefits, pension planning, and the lower rungs of the tax tables EVERY YEAR). Using commision is just a way of addressing highly variable compensation and also set up the condition for a draw.
An example of unrealized accumulated depreciation is a machine for which you paid cash last year but you will depreciate over several years - if nothing else changed, you would have a dramatic increase in cash retained this year, but no increase in profit. PS, that's why you manage to cash, you'd be surprised how many businesses go under in a theoretically profitable year because they run out of cash. That's the business case for leasing - flat cash.
Operating margins are a little different than markup (but then, a retail margin is not quite the same as markup either). And there are "gross", "net", "before allocations", ... look, this is getting way too complicated: a markup is a simple multiplier from your wholesale price to your retail price; the simplest form of margin is the difference between your actual selling price and the total costs, including allocations as well as wholesale price. Allocations are most often apportioned on the basis of simple (sometimes sunk) inventory cost and include things like heat, rent, insurance, and inventory carrying charges.
Now, the downside of all this is that even with the new accounting programs that do much of this for you; it takes time and skills to manage (or pay someone to do it); so, if you're running a store or you're a lone tradesman with a fairly steady revenue stream, you have to decide if there's enough benefit to do this. .
Phill Giles
The Unionville Woodwright
Unionville, Ontario
Thanks. Some of the differences I see are industy related, and some are just differences in terminology which may be regional. Our P&L shows sales, then direct cost of sales, and then expenses (rent, insurance, salaries, etc.) seperately. We track profitablilty of different income categories in addition to the overall profitability of the business. And, since I've been working on the books all day, I'm going to go have a glass of wine now. :-)
"A completed home is a listed home."
Sonny I appreciate the information (as well as others that have posted). Your explaination makes great sense to me. I realize that my post is going to get lost in here with all the rest, but the information here really did help me to better understand. Lars read the post the other night and I think that he even learned a thing or two :-) Thanks!Tamara
Check out http://www.state.fl./dbpr this is very helpful with license information in Florida.
Alley
CGC061467