Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #2 - NPM

When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.

But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.

By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!

Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.

Let’s dive into this week’s metric and see how it can help you turn some data into dollars.

#2 - Net Profit Margin (NPM)

What It Is -
Net Profit Margin (NPM) measures how much of your revenue is left as profit after covering all expenses—direct costs, overhead, interest, taxes, and every other cost tied to running your business.

While Gross Profit Margin uses Gross Profit (Total Revenue - Direct Job Expenses), Net Profit Margin uses Net Profit (Total Revenue - ALL Expenses).

How we calculate it -

NPM = (Revenue - All Expenses) ÷ Revenue × 100

For example, if a project brings in $500,000 in revenue and has $350,000 in direct costs and $50,000 in overhead expenses

1. Your Net Profit is $100,000

2. your NPM is:
   ($500,000 - $400,000) ÷ $500,000 × 100 = 20%

   This means your business keeps 20% of the revenue earned after all costs (or $0.20 of every $1.00 in revenue).

Why We Track It -
NPM is the ultimate indicator of your business’s overall profitability. It answers the critical question: Are you making money, or just breaking even?

For residential construction companies, NPM benchmarks typically range from 6% to 10%, depending on factors like project type and market conditions.

Why You Need to Know It -

Net Profit Margin reveals whether your business is set up for long-term sustainability or at risk of financial instability.

1. Good: Your NPM is within your goal range (I like the 8-10% for custom home builders after owners compensation)

   • Indicates you’re managing all costs effectively and generating enough profit to reinvest in your business.

2. Bad: A LOW NPM (below 6-8%) is a huge Red Flag.

   • Indicates uncontrolled overhead, pricing issues, or unexpected expenses eating into your profit.

Action Steps Based on NPM -

1. If Your NPM Is Strong (8%-12%):

   • Yes, Right where you want to be profit-wise. Your business is running efficiently and profitably.

   • Note - this does not mean your cash flow is in excellent position…we have other metrics and tools for analyzing that.

   • Use excess profits to reinvest in growth strategies, equipment, or employee development.

   • Plan for contingencies to protect your margin during slower periods or economic shifts.

2. If Your NPM Is Weak (<8%):

   • Analyze Overhead Costs: Are fixed costs like rent, insurance, or payroll too high relative to your revenue? Look for opportunities to cut unnecessary expenses. While GPM looks at direct expenses only, NPM takes overhead expenses into account as well. A comparison between GPM and NPM could help eliminate direct costs as being part of the root issue.

   • Review Pricing Strategy: Are you underpricing jobs to stay competitive? Reassess your pricing model to reflect actual costs and desired profit.

   • Manage Unforeseen Expenses: Are change orders being tracked and billed? Ensure all client-approved changes are factored into your bottom line.

3. If NPM Varies Significantly Month-to-Month:

   • Review Cash Flow Management: Inconsistent cash flow can skew NPM. For example, home builders often receive draw payments as large chunks and can be irregularly timed. Depending on the date range for which the NPM is calculated, it could appear skewed due to the timing of bills and draw receivables. Align billing and draw requests will help reduce the possibility of a skewed NPM.

   • Standardize Financial Reporting: Ensure all income and expenses are recorded accurately and consistently each month.

Conclusion

Consider NPM like your business report card - with regularly tracking and taking action based on what the NPM reveals, you’ll have the clarity to make smarter decisions and set your business on a sustainable path to growth.

At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.

Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.

What’s Next -

While NPM tells you if you’re profitable on paper, cash flow management reveals if you can pay your bills, fund projects, and handle unexpected expenses in real time. It’s the difference between knowing you’re profitable and having the cash to operate smoothly.

Stay tuned for the next episode in the Data to Dollars Series as we uncover cash flow metrics to help you operate smoothly while driving profitability to scale your business!