There are many reasons people decide to run their own business and one of the most important is to make profits. So let’s learn the proper way to work out how to quote for jobs with a specific profit margin. Just like the last blog, it’s easier to follow the process by using an example.
To keep everything clear, we’ll use straight forward maths so the process is easy to follow and you can repeat it in your business.
Let’s say this Business has sales of $100…
|Cost of Sales (Labour, Materials etc.)||$50|
|(For Labour, see previous video/blog.)|
|Overheads (Rent, Phone etc.)||$20|
From an accountant’s point of view, this is a profit margin of...
Profit/Sales = $30/$100 = 30%
For this example, let’s say 30% is the desired profit margin. But we also need to think about it from a cost plus work point of view and that means adding more than 30% to find the mark up rate required.
We do this by looking at it from the contractor’s point of view. We know your labour, materials and overheads equal $70 and you want to make 30% profit on your job. So the question is – what do you multiply your costs by (Y) to make a 30% profit?
Y = $100/$70 = 1.43 times the cost.
(1.43 x 70 = $100)
So there it is – an easy, no fuss method of making sure your profit margin of 30% is consistent for all your quoting. You simply need to multiply the cost of work by 1.43 to achieve a 30% profit margin.
The next video will bring this calculation and the previous one altogether. It’s quick and to the point so click on it and see how it all makes sense.