If you don't understand the difference between these two types of profit, you are not heading in the right direction
October 22, 2012 by Mike Draper
By Mike Draper
Most contractors would like to be more profitable. It’s what we work so hard for. But too many contractors do not have a clear understanding of which kind of “profit” they are really talking about.
The first type of profit is Gross Profit. If your definition of profit is how much you sold a job for minus how much it cost you for material and labor to complete the job, then you are talking about Gross Profit and not Net Profit.
Gross Profit is great, but you can’t start doing stuff with that money until you have deducted all the other costs associated with your business. For example, you have to pay for the operating costs of your vehicle(s), you have to pay for your tools, you have to pay for your license(s) and for insurance. You have to pay your workers’ comp payments, you have to pay (probably) an accountant. You have to keep the lights on, you have to pay for some form of marketing. You have to pay, pay and pay.
Only when all of this stuff is deducted, and more, can you arrive at your real profit, Net Profit. If you don’t allow for these costs, then at the end of the year, you may find out that you have worked for Zero Net Profit. Or a loss. Ouch.
Mike Draper is a business coach for Renovantage (www.renovantage.com) and a frequent contributor to Canadian Contractor.