The Profit Builder Unscripted

Hiring Staff Without Killing Profits

• Vicki Suiter • Episode 69

Share episode

Let us know what you think? Send me a note!

Adding a new employee should move the business forward—not drain profit.

This episode starts with a simple but powerful question a contractor asked: _”How much more work do I actually need to do if I hire another person?”

The answer isn’t guesswork, and it isn’t based on hope.

The clarity comes from looking at hiring decisions through clear financial targets.

It isn’t just about payroll. It’s about understanding how staffing decisions connect directly to gross profit, overhead, and the bottom line.  It’s actually quite simple, and in this episode, I walk you through the exact steps!

This episode walks through a practical way to think about growing your team while maintaining profit, so decisions feel grounded and clear.

Resources:

Connect with Vicki on social media:


If you love listening to this podcast, please leave a review in Apple Podcasts.


As a contractor, have you ever asked yourself the question, how much do I have to add in terms of volume if I'm adding another staff person? Whether that staff person is in the field or whether that staff person is in office person? Today, that's exactly what we're going to talk about. How do you know what is the right amount that you have to, A, add to revenue and B, how to mark that up in order to make a profit?

Phil asked me this question last week and I thought it was a great question because I hear this a lot of times from people that you're kind of trying to figure out, all right, so why do I, like, is there a formula for it that will help me determine how much I have to add to my revenue or how much I have to mark up in order to pay for that person and know that comfortably I'm still gonna make a net profit.

Hi, I'm Vicki Suiter with Suiter Business Builders. And for over 25 years, I've been helping contractors understand how to really harness the power of their numbers and know how to set goals and how to actually produce a consistent profit in their business by having the clarity and the confidence to know how to look at your numbers in a way that gives you power and gives you more control over being able to harness and drive the bottom line profits of your business to what you would like. Phil's question was this, what is the best way to adjust your gross profit goals when you put a new employee on in order to maintain your margins? Well, what was interesting about Phil's question, I actually, the first thing I did was I just asked Phil some more questions. So the first thing I did is I said, so Phil, is it a field employee or is it an office employee? And what's the position that they hold? 

Because, depending on his answer was gonna depend on how I answered his question. And I'll explain more about that as we go along. But the response that he sent me was this. He said, one of them is a field employee, it's a field supervisor, and the other one is an office administrative person. I said, great. So here's the very first thing that I told Phil that he needs to do, which is first, you need to, as a contractor, have goals for your business in terms of gross profit margin or your ROI. Contractors live and die by gross profit margin. Now, I know a lot of contractors out there, a lot of businesses have goals in terms of what they want to produce in terms of revenue, but they don't necessarily have goals about what they want to produce in terms of gross profit margin. And that is a critically important number to know because contractors live and die by gross profit margin your ability to produce a consistent ROI is really essential to your long-term success as a contractor. Meaning that when you bid a project, that project should have a goal of how much you wanna make in terms of your gross profit margin or your ROI. And I wanna make a distinction in terms really quickly here for you, which is what does it mean when I say gross profit margin?

Margin by definition is just a percentage and percentages are what I call the great equalizer. In other words, no matter if revenue goes up or revenue goes down, that percentage should stay the same. So let's say as an example that one year you do 1.3 million and the next year you do 3 million. Your gross profit margin or your ROI should stay the same.

Now, if you're a general contractor, your gross profit margin is gonna be different than if you're a subcontractor. If you're a commercial contractor that's a union shop, it's gonna be different if you're a non-union shop. So I'm not gonna try to give you benchmarks for what you should go for in terms of gross profit margin, but you wanna have a target. So that's the first thing I said to Phil is, listen, make sure that you have a clear target of what you want in terms of your gross profit margin.

And when you're looking at adding a field employee, you need to make sure that when you're bidding, so this was the second step I said is when you're bidding and you're putting that person in, I'm assuming that they're gonna be billable to jobs, which he confirmed that they would be. He you wanna make sure that when you're bidding, that you're bidding that labor at a gross profit margin or ROI that in your job, it's an entirety is gonna meet your target goals.

So the first thing is make sure that you have targets. And the second thing is make sure that when you're bidding that you actually include a markup on that employee that is sufficient to make sure that you're meeting your gross profit margin goals. Now, the whole topic of markup and margins and labor versus materials versus subs and markups and so on is a very deep subject. So I'm not gonna try to get into it today.

But simply to say that when you add another employee, if it's a field employee, and they're billable to a project, A, make sure you have a goal, B, make sure that when you're bidding, you cover them. That's one of the ways to ensure that you preserve your gross profit margin in your contracting business. So then I wanted to address the second part of his question, which was he was adding an office employee, and now his overhead was going to be going up.

And how do you account for that in terms of your company overall and making sure that you're preserving your net profit margin and your net profit goals for your business and not have that employee come out of that net profits, right? Well, first of all, let me just make a very simple distinction here. There's only two ways to affect the bottom line increase revenue or decrease costs. There's only two ways to do that. The only two ways to increase revenue are literally increase volume or to increase your markups. Charge more. There's only two ways to reduce cost. The first way to reduce cost is to literally spend less money or two to become more efficient in production. That last one is the hardest one for contractors that I see that they take on.

So when we look at if you're increasing your overhead expenses and you wanna preserve your bottom line, then you're going to have to increase your revenue, right? Because now the cost of running your business just went up. So how do you as a contractor calculate this formula in your business to determine how much do I have to do in additional volume to know? Here's the simple formula.

So as you recall, the first part of this conversation, I said the very first thing that you wanna do for your business is set goals. So the first question that you wanna ask yourself or that Phil needed to ask himself is what is his net profit goal for his business? Now, I will say one important thing when you're looking at your net profit goal for your business, that should be above and beyond your salary. So when you look at, if you want to make 250,000 on the bottom line, then that should be after your salary. Maybe it's 150, maybe it's 500,000, whatever that number is. Have a net profit goal for how much you want to make in your business. And then it's really simple. Here's the formula. So what I said to Phil is here's what you do. You're going to take your net profit goal and then you're going to look at what your gross profit margin goal is, right? That was the first thing we said. So for him, it's 35%.

For you, it might be different. And then look at your overhead expenses. So what is your total overhead expenses for running your business? So in this case, that included for Phil the new employee he was adding, his salary, rent, utilities, telephone, all those expenses that are the general and administrative expenses for running your business. That was 650. So I said, all right, so let's add these two numbers together. Let's add together the 650,000.

Let's add together the 250,000. That's a total of 900,000. So you need to make in gross profit dollars, 900,000. Well, if you have a goal of 35 % and you know you can produce 35 % gross profit margin, all you do is take the 900,000 divided by 0.35 and that will tell you the volume that you need to produce in order to get to a bottom line of 250,000 if your gross profit margin is 35%, your overhead is 650,000, then you need to do 2.5 million. So what you might do for yourself is if you're looking to add more overhead staff, this is a super easy formula for you to apply to be able to see what it is that you need to be doing in terms of volume in order to meet your net profit goal.

So just to recap this whole thing, one of the first things that you wanna do is to have goals for your business. You wanna have, which most people do, a revenue goal, and then a gross profit margin goal or an ROI goal. Remember what I said, contractors live and die by gross profit margin. And then the third thing you want is a net profit goal. What is that net profit that you wanna make?

When you have those numbers clear for yourself, then you have the ability to be able to know how to then go in and look at, okay, if I'm adding somebody to my staff and they're a field person, I just need to make sure that I have enough markup on them in order to actually make that rate of return of, let's say in this case, we were just talking about 35 % gross profit margin that's a key place where you begin to make money on your field employees is making sure that your bidding includes enough markup to get you to your desired goal. And one little trick about bidding when you're bidding is before, when you're finished with all of the numbers and you've calculated everything, I recommend that you look at your gross profit margin overall for your bid. Take your bid price, less your estimated cost giving you your gross profit dollars, calculate the gross profit margin, which is taking those gross profit dollars and dividing it by the revenue or the bid price, and make sure that it's meeting your gross profit margin goals. So that's the first thing, set goals, and then make sure that when you're bidding, that you're bidding to meet your actual goals. The second piece is that having a goal for your net profit margin is critically important and your net profit dollars. Included here down below is a link to a resource that will help you in terms of being able to read your financial statements and to look at some key numbers that will help you actually start to set some targets and goals in your contracting business. So I encourage you to check it out, download it.

⁓ It's really simple to follow and use and I think that you'll find it's really helpful for you for being able to set some targets for you to be able to make a consistent profit in your contracting business. Thanks for being here today. Feel free to leave a comment below and I'll see you next time on The Profit Builder.


Head Shot

Vicki Suiter

Host