Volume and Profits Don’t Necessarily Go Hand in Hand Most contractors are busy and excited over the amount of work they have but profits and sales don’t always follow the same path. An increased sales volume means you need more people, more cash, more management and probably will end up with more stress. The busier you get the less people tend to pay attention to details.
cause an increase in overhead and at some point, the competitive gains per unit stops. For example, suppose your rent is at $1500 a month equaling $18,000 a year. A rule of thumb is that every employee generates approximately 2000 hours a year (40 hours per week by 50 weeks). Your rental cost per field hour looks something like this:
Some of this is due to the economic principle of diminishing returns or also know as the law of marginal utility returns. This means that during the production process the gain of changing production factors will reach a point where the marginal per unit output will start to decrease. Here’s how my economics professor explained it. If you are thirsty, drinking an ice-cold glass of water is very satisfying. Each additional glass of water thereafter is less satisfying and ten glasses might even cause you to throw up. Sales volume works this way. In the beginning it can be a huge profit boost but eventually that return diminishes. Here are some things to keep in mind.
5 employee = 10,000 hours and $1.80 an hour for rent ($18,000 ÷10,000 hours) 10 employee = 20,000 hours and $.90 an hour for rent ($18,000 ÷ 20,000 hours) 20 employee = 40,000 hours and $.45 an hour for rent ($18,000 ÷ 40,000 hours)
Don’t randomly grow. Try to find your sweet spot. Most overhead items are fixed and it takes a certain volume to be competitive. However, uncontrolled growth can
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From 5 to 20 employees the rental cost per hour dropped 75%. Note from 5 to 10 employees rental overhead decreased by $.90 an hour but only $.45 from 10 to 20 employees. The cost per hour decreases slower as billable hours increase. At some point such growth will require fundamental overhead addition such as needing a bigger office or another project manager. When it comes to overhead you want to do as much volume as you can without increasing overhead or outgrowing your production capacity.
