Are you succeeding? Figuring out your margins and returns

living costs

Michael Stone has written a brief, but I think important, eletter where he provides a simple assessment of success in business.

He says a successful residential contractor should have a profit margin (after expenses) of eight per cent, with the owner earning enough after-tax personal income to meet all obligations, including 10 per cent for long-term savings and 10 per cent for tithing (or charitable contributions).

If you can pay yourself and your spouse comparable salaries and still make a 8% net profit, you’re charging enough for what you do. That’s terrific. It’s why you’re in business.

If you can’t pay yourself and your spouse, that’s a warning sign that something is wrong. Don’t ignore it, because the problem won’t go away. Figure it out, then get busy and fix it. In my experience, the fix starts with reviewing and adjusting your markup.

How did I survive? Certainly a good marriage with a tax-efficient family finances have been useful, as was a reasonably healthy inheritance.The latter allowed me to boost reserves in non-registered accounts and facilitated a corporate restructuring this year that cleared off long-standing trade debt at 10 cents on the dollar, while eliminating all bank debt (and preserving credit ratings and status.)

I’m also fortunate in that I certainly didn’t bury my head in the sand when things went south; making painful cuts and adjustments ahead (or sometimes just in time) to avoid severe insolvency crises.

But Stone’s points resonate in our current environment, as our new business moves from the bootstrap to the profitability stage. It will be really important to hold the line on waste and excessive costs and keep in mind the 8 per cent profit and fair personal salary concepts.