Mark Up Or Margin??

ruskent

At one of the seminars i took this winter, the teacher talked about markup and margain.

Turns out, i was pricing in a 20% markup on my jobs instead of margin.

Ex 10,000 job at 20% mark up is 10,000 x .20 =2000 mark up

10,000 / .80 = 12,500 which would be a 20% maragin.

This is correct right?

Bob Kovacs

Yes, that is correct. So, if you want a 20% margin, you need to use a 25% markup, or a 1.25 markup multiplier. Fun stuff, isn't it??? lol

Bob

mahlere

or divide by the difference...

for a 20% margin, take 100%-20%=80%

divide $10,000/.8=$12,500

all the same. but, hell of a difference at the end of the year between markup and margin.

Boogga

Well there you go, I learnt something new!

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PLC-Landscape

Is 20% (.8) margin a decent average number to use? Give or take a little - -

ruskent

IMO 20% is excellent. Remember, profit is whats left after you pay all your bills and your own salary.

rino1494

That is about avg. It all depends on what you are marking up though. If you markup a $5,000 item 20%, that extra $1,000 could cost you the job.

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PressurePros

I just lost a very large deal with an Australian company (Home Depot size) because the importer did not use the right terminology. They originally wanted what they said was a 50% markup but turns out they needed 50% margin. Well thats double and the deal fell apart. I'm surprised how many guys don't know the difference between the two expecially a company this size that has to put together million dollar deals every day.

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john elliott

Only if the salary you pay yourself is the same as you would need to pay someone else, someone who was equally competent and who worked the same hours as you do.

If you pay yourself more salary than that then you are paying yourself some of the profit and calling it salary.

If you pay yourself less (which is by far the most likely situation) then you are calling some of the salary you should be paying yourself, profit

As far as the taxman is concerned, it's all the same whatever you call it

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Bob Kovacs

Whoa....easy now....lets makes sure we're not talking apples and oranges here.

When people talk about "markup" and "margin", that multiplier on top of the direct work costs is typically covering overhead AND profit. If that's the case, 20% is WAY too low 95% of the time.

Unless you've got all of your taxes, workers comp, GL insurance, home office expenses, and owner's salary rolled into your labor rate, you'll go broke charging only 20% over your labor/material/equipment costs. Depending on the type of work you do, it's not unusual for that muiltiplier to need to be 1.5, 1.7, even 2.0.

Profit alone should be 8-10% of gross sales volume if you expect to build and maintain a viable business, and that's after your salary.

Bob

Tom M

So Bob how would catagorize this type of mentality.
For Example
I know this job is going to take 10 days with three man crew. I figure 750.00 per day, 200/per guy plus another 150 for daily overhead.
So I have 10 days labor 7500.00 + 3500.00 material we have 11,000.00 so if we now add 20% on 11k its + 2,200.00 or 13,200.00 total.
HMMMM
Now we have a $140,000. job rough in house labor is $22,000.00 or assuming a three man crew should accomplish this labor 29 business days @750.00. Does this logic change ? You could easily say well its actually cost me a little less than $750/day, the job should not take 29 days maybe 25 tops and I did juice up my material lists so there is extra money there. Would you say 20% on these already greased numbers is extravagant? Should the daily rate be reduced by the volumn? Is there a difference if you reduce your daily rate and increase your material allowances? Like John Elliot says your paying yourself some of the profit just depends how you approach it.

Bob Kovacs

Tom-

Alot depends on where that "$150/day" in overhead comes from- if it's a calculated number based on your actual expenses to operate your business, and it's covering all of your overhead, then 20% is too high since it's purely profit (well, it's never too high if you can get it....lol). If, on the other hand, the $150/day is a number you pull out of your azz or a number that doesn't cover all of your overhead costs, you need to recoup the rest of your costs in your markup multiplier.

The method really shouldn't change just because the job cost bigger- it's not costing you any less per day to run your business just because you're on a bigger job. I'm not quite following you on the "the job should have only took 25 days" part, so I can't comment there. As far as "juicing up the material", that's either a fudge factor to cover sloppy estimating or a contingency for some what-ifs- it shouldn't be used to reduce the amount of overhead recovery you need to put in the price, because if you burn through the "juice" money, you're now deficient in overhead recovery.

I'm not so sure I agree with the comment from John about "paying yourself a part of the profits". In my opinion, you're paying yourself a salary- the same as you'd be getting paid if you were working for someone else. Profit is an entirely different item- it's money to grow your company, cover slow periods, and compensate you for the risk you take as a business owner. If you're not going to look at profit as a separate animal from salary, you might as well just work for someone else and forget about the headaches and the risk.

Bob

john elliott

That will be because I didn't make myself sufficiently clear.

The important part of what I said was that you had to know how much it would cost to hire someone else to do your job. All of your job, and to the required standard. Once you knew that you could pay yourself that amount and call it salary. What was left over, if any, would be profit.

This exercise is especially important if one is interested in the value of one's business, which is of course based on the profit of the business and not the owner's salary.

What is most likely happening in most small businesses is that the owner is paying himself a lot less that it would cost him to hire people (probably two) to do his job. The effect of this is that his business would seem more profitable than it actually is.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Bob Kovacs

Now that makes sense.

Bob

Tom M

Bob, Isnt it all constantly changing and adjustable to the point that doesnt mean anything but the bottom line for the individual. Say that I have 2500.00 a month in bills. In a perfect world thats 125 a day for 20 monthly business days. As we know there are holidays, slow spells,weather all kinds of things that change now whatever was allotted for in the overhead is out the window.
I wish I could have a descent size in house crew but it never seems to work for me. Too many trade skills required and not enough grunt work to hire. I always sub out as much as possible to evade all the payroll and who isnt doing there job or coming in late thing, been there done that. As far predicting time completion (should have taken only 25 days) what Im saying is I always use the mindset that you make your money on the time it takes and the juice in the material. If you get done sooner and under cost you make all the allotted time, overhead and material allowance. Take an owner of a hair salon he doesnt make money cutting hair he makes money on the chairs cutting hair. ***x amount of hair cuts done by noon is overhead the afternoon is profit.

Bob Kovacs

Tom-

As far as having rain days, days without work, etc., you cover that by not calcing your OH based on "optimal conditions"- you don't spread the cost over 2,000 hours/year, you use 1600-1700- if you're going by the day, you spread it over 18 days/month, not 20. Doing this lets you cover your costs in the number of hours/days you'll realistically be working, rather than relying on the optimal situation happening every month (which it never does). On the off chance that you get an optimal day/week/month/year, the excess is gravy.

Bob

Tom M

I use 10 months a year and it never seems to be enough. lol

Bob Kovacs

Then it's time to either start using 9 months, or start doing more marketing to be able to fill up your 10 months- that part's not rocket science.

Bob

Grumpy

Good advice, but also recognize that if you are doing extra marketing your overhead will rise. Hopefully so does your volume, which is in deed a huge point to marketing, and then you can spread the added overhead over the larger volume... but the point is don't allow your added costs go unfunded... because that just means YOU are funding them personally.

Stone Mountain

When I price a job, I use COGS (cost of goods sold) plus a 50% MARKUP, which gives a 33% MARGIN.
Lately, as I get morei nto this franchise thing, I've begun to wonder: what exactly constitutes COGS.

Direct material and labour for sure.
However, is my foreman, who goes to the jobs to inspect, overhead, or is the time on the job part of it's cost?
What about deliveries?
Cleanup by my cleanup crew?
picking up specialty material that my regular suppliers don't have?
administrative office stuff?

Interesting thoughts. However, if I added the deliveries, inspections, etc to cost and marked it all up, then my sale price would be too high compared to the rest of the market (I'm already one of the higher priced companies out there)

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