Profitability
Contents |
[edit] Introduction
The term 'profitability' refers to the profit-earning capability of a business, product, project or programme. When all expenses and taxes have been paid, the revenue that is left is the profit.
To maximise profitability, a business must determine which of their activities are proving successful and which require improvement. An effective profitability strategy can only be developed if the key factors determining profitability are understood.
To maintain profitability in the construction industry, businesses must overcome the challenges posed by volatile material, labour and equipment costs and the complexity and risk of bidding on projects with long durations against tight competition.
The construction industry is notoriously susceptible to changes in economic outlook, and regularly goes through booms and busts as it is used to hold back or push forward the wider economy. The 2015 UK Industry Performance Report suggested that the profitability of the construction industry was around 3%, up from around 2% the previous year, but well below the peak of 9.9% in 2009.
[edit] Profitability ratios
A number of profitability ratios can be used to measure the ability of a business to generate revenue relative to the expenses incurred.
- Net profit margin measures the business’ ability to generate revenue. Net profit margin = (net income / net sales) x 100.
- Gross profit margin measures the cost of production. Gross profit margin = (gross profit / net sales) x 100.
- Operating margin is a measure of the percentage of revenue left after covering additional operating expense, i.e. those unrelated to the actual work itself, such as office rent. Operating margin = (operating profit / net sales) x 100
[edit] Increasing profitability
Strategies for increasing profitability will vary depending on the type of business, the nature of competition, the state of the market, and so on.
However, some general techniques that businesses can adopt to increase profitability include:
- Effective analysis of potential new projects prior to tendering.
- Reflecting on previous projects to make improvements and efficiencies.
- A good understanding of risks and mitigation strategies.
- Accurate cost planning.
- Control of fixed cost overheads such as; rent, utilities, equipment, salaries, and so on.
- Making more effective use of resources.
- Improving productivity.
- Reducing waste.
- Maintaining a tight control on variations and change orders.
- Use of accounting software and establishing robust accounting practices so that invoices and so on can be processed accurately and efficiently and cash flow maintained.
- Implementing staff training so that employees can grow their skills and responsibilities rather than finding work elsewhere.
- Investing in new technologies and systems and adapting them effectively to the business.
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
ECA Industry Awards 2024 shortlist revealed
22 leading businesses from across the electrotechnical and engineering services sector.
Government unveils Skills England strategy
Skills England to transform opportunities and drive growth.
New Government Hub for York Given Planning Green Light
For up to 2,600 civil servants, due for completion by 2028.
Construction Skills Certification Scheme cards
July update on Professionally Qualified and Academically Qualified Person Cards.
BSRIA Briefing 2024, November 22
Sustainable Futures: Redefining Retrofit for Net Zero Living.
The CLC on driving competency in the retrofit sector
Previously published roadmap on skills for net zero.
The first labour government King's speech in fifteen years
Construction industry reactions, support and some concern.
CIOB Retrofit of Buildings Technical Information Sheet
What retrofit is, the approach to be taken and processes to be followed.
Adapting Historic Buildings for Energy and Carbon Efficiency
Historic England advice note 18, free download published.
10 retrofit projects revisited 10 years after completion.
Information orders, building liability orders and SPVs
Key BSA terms and how they impact special purpose vehicles.
Listed despite problems with its design.
Zen and the art of cycling exploration.
Design Council Homes Taskforce launched
To support government 1.5 million homes target within UK climate commitments.