As the economy tightens, contractors tend to cut prices to find work. Many of these contractors really do not understand their costs, and such random cutting of costs creates financial suicide. It took years to build the organization and develop good people. Being a nice guy and taking care of people can quickly drive contractors into heavy losses. Trying to sell or “volume” your way out of a down market is a dangerous strategy.
I have a created a sample profit and loss chart (see next page). While this format may not perfectly match your own numbers, it makes for a good industry example and helps show the impact of price cutting and lower margins. We have used a company with normal sales of $2 million (Column A) and gross profit of 30% (our customers tend to be much higher, but we find the industry at large closer to 30%). The company has an overhead of 25% including $125,000 for the owner’s salary and a net profit of $100,000, or 5%. And yes, I kept the math simple; it is easy to follow the math.