The customers that make your trades business money are the ones still profitable after they carry their share of the overhead. That means the office manager, the rent and the electric, on top of the labor and materials on their jobs. Most owners judge a customer by revenue and job margin, and that can make your biggest customer look like your best one while it soaks up most of your office's time. Assign the overhead using books that are reconciled every month, then look at each customer again.
Your biggest customer might not be your best one
I talk to a lot of owners who think they know how much they're making per customer, and then nothing's ever been tied out or reconciled or really looked at dollar for dollar. I hear some version of "well, we make a bunch of money on this client" all the time. Okay, but what about all the overhead sitting over here that you never assigned to that customer? If they soak up 75% of your administrative time and none of that cost is on them, some of the profit you think you're making on them isn't there.
I understand how it happens. In a trades company the job is where you look. The crew's hours and the materials are on it, the invoice is big, and the margin on the job looks fine. What doesn't show up on the job is everything the office did to get that work in the door, on the schedule and billed.
What counts as overhead
Overhead is what you spend that isn't a direct result of a sale. The rent, the electric, your office manager, the admin assistant. As I've said on the podcast, you need to know that number to set your prices so you're actually profitable.
The catch is that overhead doesn't spread itself out evenly. Your office manager's week doesn't split up by revenue. Some customers barely need a phone call between jobs and some need the office on them constantly. So the office costs (the people, plus the office's share of the rent and the electric) go by how much of the office's time each customer takes. The shop, the yard and the insurance don't care who calls the most, so those can go by revenue. If you split everything by revenue, or don't assign it at all, the heavy ones look a lot better than they are.
Why your invoicing software can't answer this
A lot of owners try to answer the customer question out of whatever tool they use to invoice, or out of their CRM. Those tools give you a lot of pretty numbers, revenue for sure and maybe some of the hours somebody worked on something. But the rent and the electric and the office manager aren't in there.
The answer has to come from your books, and only if they're reconciled every month so every dollar and every cent is in them. If the books are a few months behind, or nobody has tied them out, any number you build per customer is a guess with a spreadsheet around it.
An example with made-up numbers
Every number in this section is invented and rounded to show the math. It isn't from a client, so plug in your own.
Say a trades company does $250,000 a month, about $3 million a year. After labor and materials on the jobs, it keeps $65,000 a month of gross profit, and overhead runs $40,000 a month. That leaves $25,000 a month of profit, 10% of revenue.
One general contractor sends it $60,000 a month of work, and those jobs run a 25% margin, so that customer brings in $15,000 a month of gross profit. It's the biggest name on the board and everybody likes the volume. Then the owner sits down with the office manager and walks through a normal week, and it turns out that one customer takes about half the office's time. Say $25,000 of the $40,000 is the office (the office manager, the admin help, the office's share of rent and utilities). Half of that is $12,500. The other $15,000 (the shop, the yard, insurance) has nothing to do with phone calls, so split it by revenue, and this customer's 24% share is $3,600. That's $16,100 of overhead on a customer bringing in $15,000. The account that looked like the best one is losing about $1,100 a month.
Everything else, $190,000 a month of work, brings in $50,000 of gross profit and carries the other $23,900 of overhead, which leaves $26,100. The rest of the business is making all of the money and covering the big customer on top of it.
I'm not saying fire them
Walk away from that customer and the $16,100 doesn't leave with them. The rent and the office manager are still there next month, so you could end up worse off than you are now. What I'd do with that number is go have the price conversation on that work, or change how the office handles them so they don't need so much of it, and quit chasing more customers who look just like them.
The customers your crew wants to work for
A lot of times a successful trades company has a mixed bag of revenue sources, and somewhere in that bag is the ideal customer. It's the work with the best margins, and a lot of the time it's also the work your people actually want to do and are trained to do. Go talk to anybody on your crew and they'll tell you, I hate this or I hate that. That's the work I'd want more of: the jobs that make the best margin and keep your people happy.
Growing toward the ones that hold up
Once you know which customers hold up, I like to sketch out the business with more of that work and less of the other. Put a cost and a revenue number on it along with how many of those customers you'd need, and see what the bottom line looks like. That's how you keep growing without just growing your sales number and your expense number at the same time and not making any more money. I wrote more about that in is growth killing your bottom line.
The same math applies to the next hire. Add administrative help and the office gets more expensive, so that cost needs to be in your pricing and the next work you take on needs enough margin to carry it. I wrote about the labor efficiency ratio as one way to tell when that hire makes sense.
This is a lot of what I do with skilled trades and construction companies at DAT Finance. We look at your customers next to your pricing and your overhead, so you know which work is paying for the rest before you chase more of it. If there's a customer you're not sure about, let's talk it through.
FAQ
How do I figure out profit per customer in a construction company? Start from books that are reconciled every month. Take the gross profit on each customer's jobs (revenue minus the labor and materials on them), then subtract that customer's share of overhead. What's left is what the customer actually makes you.
What overhead should I assign to a customer? The costs that aren't a direct result of a sale, like rent, electric, your office manager and admin staff. Split the office costs by how much of the office's time each customer takes, because a customer who needs constant attention costs more to serve than the invoice shows. Costs that don't follow office time, like the shop or insurance, can go by revenue.
Can I get customer profitability from my invoicing software or CRM? Not all of it. Those tools show revenue and maybe some hours, but not the rent, the electric or the office manager. That has to come from your books, reconciled every month.
Should I drop a customer that loses money after overhead? Not automatically. The overhead you assigned them stays when they leave. A better first move is to raise the price on that work or change how the office handles them, and to stop chasing more customers like them.