Contents:
What is net profit?
Net profit is the financial result for a period after recognised expenses, including interest and the relevant tax. It is not the same as the balance in your bank account. Repaying the principal of a loan reduces cash and debt, but does not in itself reduce profit.
Every construction professional should know this:
- Changes in net profit growth are important when assessing business profitability.
- Net profit growth is one of the key business performance indicators.
- The higher your net profit, the better your chances of surviving a crisis. You can use retained earnings to build a company reserve fund (article in Russian).
- Business owners often mistake profit before tax for net profit, but this is incorrect.
- In construction, net profit is most often affected by hiring terms, demand, service promotion, improvements in construction technologies, and employee motivation.
The formula for calculating net profit
In simplified form: net profit = income for the period − all recognised expenses for the same period, including interest and taxes. Count each item once.
For a construction company, it is useful to track project costs separately from general overheads. For example, with income of RUB 1,200,000 and expenses of RUB 500,000 for materials, RUB 300,000 for work, RUB 50,000 for logistics, RUB 100,000 for management, RUB 20,000 for interest, and RUB 30,000 for taxes, net profit is RUB 200,000. This is a hypothetical calculation; taxes and the timing of income and expense recognition are determined by the applicable accounting rules.
You may be surprised by how your profit for a period gradually shrinks when you lay out every company expense. You can start with a table of fixed and variable costs (article in Russian):
| Fixed costs | Variable costs |
|---|---|
| Office rent | Materials |
| The fixed salary component of employees’ pay | Pay for tradespeople |
| Taxes whose amount is set in advance for the period concerned, where the applicable tax regime provides for this | Pay for people whose remuneration is based on a percentage |
| Loan interest on a fixed schedule for the period concerned | Training and participation in events, if these costs vary with the volume of work |
| Payments for various services | Logistics and storage charged by volume; fixed warehouse rent is classified as a fixed cost |
| Taxes whose amount depends on revenue or the financial result; the types of tax depend on the tax regime | |
| Advertising expenses, if they are not fixed | |
| Agency commissions |
This list helps you identify the inputs for the net profit formula correctly. Many managers deduct only wages and materials from revenue and temporarily forget everything else. That is a mistake: the bills will still need to be paid, so it is better to set aside money in the company reserve fund for these expenses in advance. The next step is to understand exactly what to include in your markup so that you consistently make a profit even when unexpected expenses arise.
Why do we need net profit?
You might ask: “What if we just analyse profit before all deductions? Nothing will happen.” We would caution against this approach, because an accurately calculated net profit figure gives the clearest picture of your successes and disappointing setbacks.
Knowing your net profit allows you to:
- assess the company’s financial stability;
- plan growth and the purchase of new tools;
- support applications for financing; the ability to pay is also assessed using cash flows, debts, and payment deadlines;
- build relationships with partners and attract new suppliers offering more favourable deferred payment terms;
- attract investors.
How can you increase net profit?
Here are some simple recommendations that may be useful for both construction and finishing contractors:
Increase sales volume
Assess sales volume alongside the profitability of each project. Renovating two apartments of 30 m² each and building a 500 m² house involve different volumes of work, but floor area and the number of projects alone do not determine revenue or profit: prices, the scope of work, and costs matter.
Focusing on profitable projects may reduce the costs of management, travel between sites, and communication with customers. Compare these savings with any potential reduction in revenue to assess the effect on net profit.
Raise prices
Base price increases on data about costs, demand, and service profitability. If net profit is low, investigate the causes and assess how a new price will affect order volume. A price increase is useful when it improves the financial result after taking customer reactions into account.
Reduce spending
You may find this advice helpful: “Turn fixed costs into variable costs that depend on sales volume.” For example, you can agree on a variable component of pay if employment rules and agreements allow it, negotiate a discount with the warehouse owner, or switch logistics providers. Optimisation matters!
Reconsider “minor expenses”
Calculate the cost of manual recordkeeping: an employee’s time, the cost of that time, and the expense of checking for errors. Then compare it with the current subscription price of the service you choose and its implementation costs. Freed-up time can be used for other tasks; cash savings arise only when actual expenses fall.
The result depends on your company’s processes. Compare time spent on recordkeeping and data quality before and after implementation, instead of assuming a guaranteed number of hours saved. You can consider the 101 App as a tool for project recordkeeping.
