This YouTube conversation (Sam and Jim Johnson) focuses on why contractors must know their business numbers to judge real progress, budget effectively, and align company size with desired profitability and team lifestyle. Key points in this segment: if revenue doubles but owner take-home doesn't, growth may be due to reinvestment or leaking profit; a cited client did $12 million with ~4% net profit, illustrating poor returns despite high revenue; the “perfect size” of a company is described (attributed to Paul Reid) as matching the revenue the business was budgeted to produce; and the trade-off between pumping revenue through a fixed team (higher stress/turnover) versus underutilizing capacity (lower profitability) is emphasized.
Questions this video answers
$12 million.
Approximately 4%.
Paul Reid from Northwest Roofing (Colorado).
Chapters
But knowing those numbers is, is so critical to be able, being able to understand if you've made advancements, I mean, have you actually taken a step forward? So, for example, if you doubled your revenue one year over another, but your net take home dollar wise is exactly the same, well, you waste a lot of time. But did you. Or was it because you reinvested back into your business to grow additionally further?
Could be.
And so, and it could be because, because you might be sacrificing the amount of money that you pull out of your business as a business owner now, because you're trying to create that momentum and that build towards getting your company to the place that you're trying to get it.
Or you may have chosen to give.
Or you might have chosen to give it away, or we may have just been making mistakes and leaking money all over the place. But if you don't know what those numbers are, I mean, we had a client a number of years ago, they had three locations, they did 12 million. And I think their profit was somewhere in the 4% net profit range. I thought you were gonna say 4 million. No, no, no.
4%.
4%. And I remember specifically the brokenness that he felt because he was like, I killed myself last year and I could have made more money as a sales rep for one of my competitors for this number right here, for all that.
Work and all that effort and not setting budgets to start with. And that's, I think, one of those big concepts that we as solopreneurs growing into entrepreneurs miss. Because we haven't been to business school or any of that kind. We kind of learn it by.
Well, and when you're by yourself, like just like us. Personally, when I was, you know, a bachelor, I didn't really need to worry too much about budgets because I was the only one making my money and I was also the only one spending it. I knew where all of it was. Okay? Now as soon as I add a wife and I have a child and.
You just went up on the child.
There'S somebody else who has access to my finances than I do. Now all of a sudden, she and I need to start having conversations about what our goals are and where we want to allocate our resources and for what. And so you got to do the same thing inside of your business and your business might hit a point and you're making the amount of money that you want to make because that's the part that's key. So in this conversation, a lot of people talk about what's the ideal Size of a company, like, well, is 5 million is the right size, is it 10 million, is it 20 million? What's the right size of a company? I'll attribute this concept to Paul Reid from Northwest Roofing out of Colorado. And what he said that I thought was brilliant was the perfect size of your company is producing the revenue that you budgeted your company to produce. If you built your company to be a ten million dollar company and you hit six, that's bad. If you built your company to be a $10 million company and you hit 15, that might not be good either. And the reason is because what you'll find is there's this lifestyle to profit. There's a lifestyle to profit ratio and it varies for everyone. What I mean by that is, is that the fewer people we have, the lower our overhead, which means the higher our profitability, the more revenue you pump through your people, the more stress, their stress level is going to rise. We all want to, most of us want to work full time, we want to work hard and we want to do a good job. We have no problem with putting in a good day's work. You pump too much, too much volume through that business. People are now beginning to overclock themselves. You're getting, you're overclocking your business. People are working extra hours, they've got extra stressors, they're dealing with too many clients per person. They're just, everybody is just getting worn out. Like wearing a pair of jeans just way too often. Like, it's just getting too much stress, okay? And something might break. That's a lifestyle problem, okay? And here's what happens. Profitability is amazing. Profitability is amazing because we did 15 million with a company built for 10. But our people are toasted. They're burnt, they're leaving. They're toasted. Okay? Now you have a $10 million company and you do 6 million. Your overhead was designed for 10, which means your profitability is going to be pretty low. But, but nobody had hardly any stress because there really wasn't that much work to do. So the answer to that question is what exactly is that ratio? And you don't know how to find it unless you know your numbers. So what is my team capable? What is it like for my team to do 3 million? Was everybody stressed out? Do we need to add people if we want to grow? Or was 3 million a pretty comfortable move? And what was the profit margin that we saw on that and am I okay with that? So in order to build the kind of lifestyle that you and your people want. You have to understand those numbers so that you can equate, equate that stress level and lifestyle to the profitability or the reward that comes with it.
Yeah, we get too caught up with this idea of I want to be uber, uber profitable and squeezing every ounce out of our people that we can, which leads to a lot of turnover, retraining and stagnates our growth, which ends.
Up costing us more in the end.
And costs us a lot more in the end. Where if we were to budget correctly for that growth and saying, hey, I want to. One of the biggest problems I see is people growing too fast without having the budget for it. Now, companies can certainly double, triple, quadruple, even 10x, as long as they budget for it, plan for it, and have the right opportunity for it. Like, you really need to measure that. And so when you get into numbers, there's a lot of things that you need to consider about market size, available work to be done, how much, what's the market cap of your particular trade that you do in your market? How much of that can you capture in market share? Those are things that people don't really think about. They just think about, how can I do more? Right, well, what if you're in a small market, you got 100,000 people in your market? Well, there's only going to be so much market share that's available to you there. Maybe in whatever trade you do. There's, I don't know, $50 million worth of that work in a year, and there's 25 other competitors. How much of that market share can you get based on this budget that you set aside? Those are the big things and those are the big numbers, the big concepts that I don't think enough contractors really delve into to determine what size does my company need to be with the market that's available to me. Sam.
