Is your business making money or profit? I want to clarify that increasing sales does not equal profit. Contractors operate on thin profit margins, and one unforeseen issue on a job can mean you are working for NO PROFIT!
As a business owner, you need to at least make a return on the financial investment in your company that is equal to any other financial vehicle in the marketplace. Profits are essential for funding growth and to build cash assets to protect the company from economic and market downturns.
Let’s start with the Return on Sales (ROS) ratio. ROS provides insight into how profitable company sales are.   It is the Net Profit divided by Gross Sales. The Plumbing & HVAC service contractor’s ROS average is 2% according to First Research®.   Essentially for every $100,000 in sales, contracting businesses generate on average $2,000 in Net Profit.
The Return on Investment (ROI) ratio shows how much owners are making on investments in a business. The owner should compare this ratio to other market investments, such as mutual funds, stocks, bonds, etc., to see if your investments are better left in the company or put into other market investments. This ratio is the Net Profit of a current period divided by the Net Worth at the beginning of a year. The First Research® Industry Profile dated February 2014 shows the industry average is 15.8% for Plumbing & HVAC Service Companies. The goal of monitoring this ratio is to make sure the current return is comparable to or better than any other investment. The Dimensional Matrix Book 2012 and 2013 from Standard & Poor’s shows the S&P 500 return on investment was 16% and 32.4% respectfully. A good benchmark is the S&P 500 to understand how your investment in your company is measuring against the market as a whole. Your goal is to achieve or exceed the market if possible. If you do not achieve the target consistently, you need to understand the reason for not making the grade. This tells the owner if the business investment is eroding or increasing in returns.
In addition to having your bookkeeper give you a P&L statement and a balance sheet, you need a monthly KPI Dashboard report. It’s the key ratios of your financial statements that provide historical and current insight into your business health. As the company owner, you need to become familiar with the performance-to-drive cash flow, pay debt, finance capital investments, as well as management of assets and profitability.