k guys, im givin my wacky theory another "go" ... it's Friday night and im waitin on dinner ...
Before you read any further ...
1) All numbers and dollar amounts, percentages, etc. are hypothetical.
2) Do not, again, do not look at the numbers. Instead, look at what the numbers are doing
3) Terms & definitions. This was a huge hang up last time, b/c whether by my fault or not - some people got confused on words.
4) Yes, I realize not every job costs the same ...
5) I do not claim this to be gospel ...
Gross Profit is the difference between Revenue and Variable Costs (your project's costs)
Revenue - Project Cost = Gross Profit.
Overhead is the cost of doing business. Not the cost of your project.
ok ...
you have an overhead of $200,000
you have 50 work weeks in the year (2 weeks off for holidays).
you have 40 hours in a work week
you have 2,000 hours in a work year.
your hourly rate is $100. Why? because you have taken your overhead and divided by the number of hours in a year. 200,000 divided by 2,000 equals 100.
ok ... with me?
You install fiberglass pools. You offer a "standard" package. This includes ______ and although you sell options (add-ons), you offer a standard package.
This standard package takes you 50 hours to install.
(stop. now you're going to say "well what about extras and this and that---" .... stop. If there is anything "extra" that deviates from your "standard" package ... it is called an "option" or an "add-on")
ok. You install fiberglass pools and a standard package takes you 50 hours to complete. You have an overhead of $200,000 and 2,000 hours in a year.
Now ... to install this standard package ... it will cost you $40,000 in materials and any outsourced labor (your in-house labor, i.e. employees are included in your overhead).
You will spend $40,000 to install this standard package for you customer.
ok? with me so far?
Revenue (price your customer sees) = ?
Project Costs (what you'll pay) = $40,000
Gross Profit (Revenue - Project Costs) = ?
Hours to Complete Installation = 50
Hours in a Work Year = 2,000
Your hourly rate = $100
If the installation of your standard package takes 50 hours, you, alone, only are capable of installing 40 pools in the year.
(do not think about hiring employees or anything else right now until this part sinks in)
I repeat ... If the installation of your standard package takes 50 hours, you alone only are capable of installing 40 standard pools in a year.
you have a $200,000 overhead and are capable of selling 40 standard packages because there are only 2,000 hours in the year.
How much does your gross profit need to be?
Remember. This is the mathematical difference between your revenue and project cost. This is what you will use to pay your overhead.
Ok ... so how much should this gross profit be?
Well ... how much will the market tolerate?
Will you buy this standard package from me at $240,000??
probably not. But damn - I could have spent the $40,000 on the cost of the project ... and had a gross profit of $200,000 ... and I could have paid my overhead. I could have broken even.
On the other extreme.... can I sell you this standard package for $40,000. Yep - probably. Because everyone else is going to be much higher --- YAY!!!! A SALE!!!
oh wait ... it'll cost me $40,000 to build it. My gross profit will be zero ... and I won't be able to pay my overhead.
Ok ... can I sell you this standard pool for $60,000 ??
Yes?? Really?!? GREAT!! Can't wait to start!!
Why did you say "yes" just now?? (play along if you didn't, lol).
it's because that is a competitive price.
It STILL costs me $40,000 to install that pool rather you bought it from me for $40,000 ... or $240,000 ... or $60,000. It STILL costs me $40,000 to install it.
NOW --- YOU bought it from me because the price that you see is competitive --- heck, it's right around everyone else. That price is tolerated by the market
And since you bought that from me ... I will spend $40,000 to install it ... and I will earn $20,000 in gross profit. That gross profit is tolerated by the market.
With me?
Revenue = $60,000
Project Cost = $40,000
Gross Profit = $20,000
Now ... your gross profit is $20,000. This will be used pay your overhead for the year.
Your overhead is $200,000
You will need to install 10 standard packages to break even.
On your 11th installation ... you will have $20,000 in profit.
By your 12th ... you will have $40,000 in profit
By your 13th ... you will have $60
Here's the best part ...
your hourly rate is $100.
it takes you 50 hours to install the pool
that is $5,000.
Some of you, I think ... would have taken your project cost and added on your HOURLY rate.
Which would look like this:
$40,000 + $5,000 = $45,000
You would have spent $40,000 .... and made a gross profit of $5,000
AT THAT RATE ...
$200,000 divided by $5,000 = 40
This means, if you were to charge your hourly rate, for the amount of hours it took to install ...
You would have to install 40 pools a year.
This is exactly what you have the capacity to do. Remember ... 2,000 hours in a year ... 50 hours per pool ... 40 pools.
Point is ... will you break even after 40 pools ... or 10 ???
Your market and your competition will decide that. You have to get a sense for that.
What is the highest gross profit you can earn on top of your project cost? The higher the number, the lower amount of sales it will take to break even and begin earning PROFIT. (just be sure to set some of that aside for taxes ... hehe)
Now ... you yourselves will know what your market tolerates ... whether it is a $5,000 gross profit ... or a $20,000 ... or a $200,000
if you're still confused:
$40,000 x 50% = $20,000 ...... revenue of $60,000
project cost x whatever markup = gross profit ....
$40,000 x 20% = $8,000 ... revenue of $48,000
play with it ... let me know what is clear and what is not ... again ... im not preaching gospel here.
Before you read any further ...
1) All numbers and dollar amounts, percentages, etc. are hypothetical.
2) Do not, again, do not look at the numbers. Instead, look at what the numbers are doing
3) Terms & definitions. This was a huge hang up last time, b/c whether by my fault or not - some people got confused on words.
4) Yes, I realize not every job costs the same ...
5) I do not claim this to be gospel ...
Gross Profit is the difference between Revenue and Variable Costs (your project's costs)
Revenue - Project Cost = Gross Profit.
Overhead is the cost of doing business. Not the cost of your project.
ok ...
you have an overhead of $200,000
you have 50 work weeks in the year (2 weeks off for holidays).
you have 40 hours in a work week
you have 2,000 hours in a work year.
your hourly rate is $100. Why? because you have taken your overhead and divided by the number of hours in a year. 200,000 divided by 2,000 equals 100.
ok ... with me?
You install fiberglass pools. You offer a "standard" package. This includes ______ and although you sell options (add-ons), you offer a standard package.
This standard package takes you 50 hours to install.
(stop. now you're going to say "well what about extras and this and that---" .... stop. If there is anything "extra" that deviates from your "standard" package ... it is called an "option" or an "add-on")
ok. You install fiberglass pools and a standard package takes you 50 hours to complete. You have an overhead of $200,000 and 2,000 hours in a year.
Now ... to install this standard package ... it will cost you $40,000 in materials and any outsourced labor (your in-house labor, i.e. employees are included in your overhead).
You will spend $40,000 to install this standard package for you customer.
ok? with me so far?
Revenue (price your customer sees) = ?
Project Costs (what you'll pay) = $40,000
Gross Profit (Revenue - Project Costs) = ?
Hours to Complete Installation = 50
Hours in a Work Year = 2,000
Your hourly rate = $100
If the installation of your standard package takes 50 hours, you, alone, only are capable of installing 40 pools in the year.
(do not think about hiring employees or anything else right now until this part sinks in)
I repeat ... If the installation of your standard package takes 50 hours, you alone only are capable of installing 40 standard pools in a year.
you have a $200,000 overhead and are capable of selling 40 standard packages because there are only 2,000 hours in the year.
How much does your gross profit need to be?
Remember. This is the mathematical difference between your revenue and project cost. This is what you will use to pay your overhead.
Ok ... so how much should this gross profit be?
Well ... how much will the market tolerate?
Will you buy this standard package from me at $240,000??
probably not. But damn - I could have spent the $40,000 on the cost of the project ... and had a gross profit of $200,000 ... and I could have paid my overhead. I could have broken even.
On the other extreme.... can I sell you this standard package for $40,000. Yep - probably. Because everyone else is going to be much higher --- YAY!!!! A SALE!!!
oh wait ... it'll cost me $40,000 to build it. My gross profit will be zero ... and I won't be able to pay my overhead.
Ok ... can I sell you this standard pool for $60,000 ??
Yes?? Really?!? GREAT!! Can't wait to start!!
Why did you say "yes" just now?? (play along if you didn't, lol).
it's because that is a competitive price.
It STILL costs me $40,000 to install that pool rather you bought it from me for $40,000 ... or $240,000 ... or $60,000. It STILL costs me $40,000 to install it.
NOW --- YOU bought it from me because the price that you see is competitive --- heck, it's right around everyone else. That price is tolerated by the market
And since you bought that from me ... I will spend $40,000 to install it ... and I will earn $20,000 in gross profit. That gross profit is tolerated by the market.
With me?
Revenue = $60,000
Project Cost = $40,000
Gross Profit = $20,000
Now ... your gross profit is $20,000. This will be used pay your overhead for the year.
Your overhead is $200,000
You will need to install 10 standard packages to break even.
On your 11th installation ... you will have $20,000 in profit.
By your 12th ... you will have $40,000 in profit
By your 13th ... you will have $60
Here's the best part ...
your hourly rate is $100.
it takes you 50 hours to install the pool
that is $5,000.
Some of you, I think ... would have taken your project cost and added on your HOURLY rate.
Which would look like this:
$40,000 + $5,000 = $45,000
You would have spent $40,000 .... and made a gross profit of $5,000
AT THAT RATE ...
$200,000 divided by $5,000 = 40
This means, if you were to charge your hourly rate, for the amount of hours it took to install ...
You would have to install 40 pools a year.
This is exactly what you have the capacity to do. Remember ... 2,000 hours in a year ... 50 hours per pool ... 40 pools.
Point is ... will you break even after 40 pools ... or 10 ???
Your market and your competition will decide that. You have to get a sense for that.
What is the highest gross profit you can earn on top of your project cost? The higher the number, the lower amount of sales it will take to break even and begin earning PROFIT. (just be sure to set some of that aside for taxes ... hehe)
Now ... you yourselves will know what your market tolerates ... whether it is a $5,000 gross profit ... or a $20,000 ... or a $200,000
if you're still confused:
$40,000 x 50% = $20,000 ...... revenue of $60,000
project cost x whatever markup = gross profit ....
$40,000 x 20% = $8,000 ... revenue of $48,000
play with it ... let me know what is clear and what is not ... again ... im not preaching gospel here.