Apr 18, 2025
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 sharie@fasteasyaccounting.com