Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even - Business - Contractor Talk

Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even

 
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Old 02-23-2007, 11:48 PM   #1
 
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Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


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.
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Old 02-24-2007, 02:53 AM   #2
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by dirt diggler View Post




(your in-house labor, i.e. employees are included in your overhead).
No, that's wrong, and it kind of messes up the rest of it, doesn't it?

You should work out how much total labor (including other employees) is available in a year, then your total overhead, then divide the overhead by the billable hours (all of them, not just yours). That, added to your direct labor costs, gives you you labor rate.

You can quickly see how having more employees means that you can cover your overhead with a lower labor rate (you don't necessarily need to pass this on to the customer, you should alway bid based on the value of the job if that is higher)

John

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Old 02-24-2007, 07:03 AM   #3
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


OK, I don't mean any disrespect here, but did I just spend 10 minutes to get to the point that the more I charge, the faster I break even or the more money I make? Was this concept ever confusing to anyone????
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Old 02-24-2007, 07:22 AM   #4
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


DIRT
I think you should watch the weather on TV while waiting
for dinner then go to bed, get early Sat. am and go to work
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Old 02-24-2007, 09:32 AM   #5
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by Woodcrafter74 View Post
OK, I don't mean any disrespect here, but did I just spend 10 minutes to get to the point that the more I charge, the faster I break even or the more money I make? Was this concept ever confusing to anyone????


it's better than saying

"I'll charge as much as I need to and make as many sales as possible"


it gives you a number
that number is not set in stone
but it is a guideline

what's so confusing about it???
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Old 02-24-2007, 09:52 AM   #6
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by john elliott View Post
No, that's wrong, and it kind of messes up the rest of it, doesn't it?

You should work out how much total labor (including other employees) is available in a year, then your total overhead, then divide the overhead by the billable hours (all of them, not just yours). That, added to your direct labor costs, gives you you labor rate.

You can quickly see how having more employees means that you can cover your overhead with a lower labor rate (you don't necessarily need to pass this on to the customer, you should alway bid based on the value of the job if that is higher)

John
Ok ... let's see if I understand what you're saying John ...



If I have that $200,000 overhead

and it costs me $30,000 to have one employee

and I have 3 employees - that is $90,000 I will be paying in a year

(and then there's me - but my salary is included in that overhead) - so 4 guys

ok - im getting it ---


4 guys ... 2,000 available hours = 8,000 available hours


290,000 divided by 8,000 = an hourly rate of $36.25




hmm ok --- i think (if I just went through this right) i see what you're saying.


$60,000 project
$40,000 variable costs

50 hours to complete ... hourly charge of $36.25
4 men


4 x $36.25 = $145


and here's what it looks like doing it my way

$290,000 (3 additional employees + me)

divided by the total hours in a work year (2,000)

290,000 divided by 2,000 = $145


so it works out the same???
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Old 02-24-2007, 11:18 AM   #7
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Dirt


There are a number of faulty reasonings in your last post



I am going to have to think how to explain it to you



Maybe you would like to have another think about it in the meantime



Looks like I've got some key bounce on my 'enter' key too


Talk to you later


John
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Old 02-24-2007, 11:49 AM   #8
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Dirt-
I always figgered that if I could charge twice as much as I do, and only end up getting 1/2 the work I get, I'd be WAY ahead, 'cept I guess more time to spend the same amount of $.

I try to charge as much as the market will bear, and maybe a little more.
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Old 02-24-2007, 12:33 PM   #9
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by Forry View Post
Dirt-
I always figgered that if I could charge twice as much as I do, and only end up getting 1/2 the work I get, I'd be WAY ahead, 'cept I guess more time to spend the same amount of $.

I try to charge as much as the market will bear, and maybe a little more.
certainly!

it's what the market will bear


Forry (and anyone else)


It takes me $40,000 to install a standard fiberglass pool

i have an overhead of $200,000


will you buy that pool for $240,000??

Cuz if you do --- great! I can break even after one project --- yours

But you won't buy it. Because Jo-Blo will come in and say "I'll do it for $50,000" or Hank the Poolman will come in and say "I'll do it for $60,000"


so, being at 240,000 - as a revenue price - I am far too high obviously


being at a revenue price of $40,000 - I am far too low because I will only break even ON THE PROJECT - but fail to pay any overhead


being at $45,000 ... I am the lowballer (if Jo-Blo and Hank are charging 50 or 60) --- but stand a chance at getting the job, right?


However, since I only have the capacity to install 40 of them in a year -- at 5K gross profit - I will only break even at the end of the year.

I will never make a true profit ... 40 installs ... $5K each = $200,000


This is also shows how just because you are "busy" ... does not mean you are making any money
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Old 02-24-2007, 01:13 PM   #10
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Dirt, are you sure that the market controls how much you can charge for your goods and services? Is a 20x40 pool a 20x40 pool and should the price be the same since the client will end up with a 20x40 pool?

I do not know the pool industry nor do I know your market but here is some food for thought;

Window installations in my area go from $175 each (labor &material) all the way up to $1200 each. In most cases you end up with a window that goes up and down, tilts in to clean, douple pane, has a warranty........... If you transfer these numbers to a house with 20 windows you end up with a project that varies from $3500---$24,000!

If you look at the list of the top 100 companies by sales volume, you will find one of the $175 companies and the $1200 company both on the list, I believe that they both are in the top 50.

Granted windows and pools have very little in common but the concept is control your overhead, control you price and take your market share.
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Old 02-24-2007, 01:13 PM   #11
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by dirt diggler View Post
If I have that $200,000 overhead
and it costs me $30,000 to have one employee
and I have 3 employees - that is $90,000 I will be paying in a year
(and then there's me - but my salary is included in that overhead) - so 4 guys
ok - im getting it ---
4 guys ... 2,000 available hours = 8,000 available hours
290,000 divided by 8,000 = an hourly rate of $36.25

hmm ok --- i think (if I just went through this right) i see what you're saying.
That would seem reasonable enough so far, I'm not entirely sure about your including your salary in the overhead but let's go along with that

Quote:
Originally Posted by dirt diggler View Post


$60,000 project
$40,000 variable costs
Now that I don't get. Can you try rephrasing it please
Quote:
Originally Posted by dirt diggler View Post
50 hours to complete ... hourly charge of $36.25
4 men


4 x $36.25 = $145
Do you mean that it is actully taking 200 hours to complete? I presume you do, why else would you be multiplying your hourly rate by 4?
If that's the case, then your labout costs on this job should be, using your figures, 200 x $36.25=$7,250. Add the cost of the materials and that is what you bid the job at because you are recovering your overhead through you labour rate.

Quote:
Originally Posted by dirt diggler View Post

and here's what it looks like doing it my way
$290,000 (3 additional employees + me)
divided by the total hours in a work year (2,000)
290,000 divided by 2,000 = $145
so it works out the same???
Well the math works but do all your jobs require four people, never more and never less? Why not just figure the actual man-hours and multiply it by your labour rate, wouldn't that be easier?

John
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Old 02-24-2007, 01:41 PM   #12
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


thanks for taking time to look into this john

(and all others)

I've got to finish something (yeah, working for once)

give me a couple minutes (which means an "hour" in contractor-speak)


hehe

Last edited by dirt diggler; 02-24-2007 at 02:23 PM.
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Old 02-24-2007, 02:40 PM   #13
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


I am not a fan of dividng my overhead by hours. No, instead I prefer to divide my overhead by days and by average crews per day. The only time I use an hourly variable for overhead is when I am working T&M. There are many reasons for this, but let me try to explain.

I MUST generate (using last years numbers) $750 per day after labor and material, just to cover my over head. It doesn't matter if I have one or 10 employees or subs out working. It doesn't matter if the hours worked =10 or =200. I must generate that number!

If I had my hours marked up for overhead and didn't work enough hours, I wouldn't break even that day.

Your best bet to figure all this out is to sit down with your accountant. Give him your books and ask him what your daily, or hourly, overhead variable is. Also ask him to help you formulate your pricing to reflect this overhead variable, plus your desired overhead.

YOu can mark up hours, days, or trucks. It doesn't matter, I just find markuping up the days to be more accurate for my scenario. One side note... Labor burdens are directly marked into hours.
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Old 02-24-2007, 03:31 PM   #14
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Quote:
Originally Posted by john elliott View Post
That would seem reasonable enough so far, I'm not entirely sure about your including your salary in the overhead but let's go along with that


Now that I don't get. Can you try rephrasing it please


Do you mean that it is actully taking 200 hours to complete? I presume you do, why else would you be multiplying your hourly rate by 4?
If that's the case, then your labout costs on this job should be, using your figures, 200 x $36.25=$7,250. Add the cost of the materials and that is what you bid the job at because you are recovering your overhead through you labour rate.



Well the math works but do all your jobs require four people, never more and never less? Why not just figure the actual man-hours and multiply it by your labour rate, wouldn't that be easier?

John
shoot, i don't know how to do fancy cut/paste - so bear with me


That would seem reasonable enough so far, I'm not entirely sure about your including your salary in the overhead but let's go along with that

why wouldn't my salary be a part of my overhead? It is a business expense. It is a cost of doing business.



Now that I don't get. Can you try rephrasing it please


sure, I was using the numbers from the original post in this thread.

My standard package costs the customer $60,000. This is revenue

I costs ME $40,000 to install it (project costs, i.e. materials)


Do you mean that it is actully taking 200 hours to complete? I presume you do, why else would you be multiplying your hourly rate by 4?
If that's the case, then your labout costs on this job should be, using your figures, 200 x $36.25=$7,250. Add the cost of the materials and that is what you bid the job at because you are recovering your overhead through you labour rate


No. It is still taking me 50 hours to complete the install. The reason I am multiplying by "4" is because there are 4 men working at an hourly rate of 36.25.

But I am going to charge for each of those guys.

Ok ... so it would look like

50 hours. 4 men. $36.25 per hour
4 x $36.25 = $145

$145 x 50 = $7,250


Well the math works but do all your jobs require four people, never more and never less? Why not just figure the actual man-hours and multiply it by your labour rate, wouldn't that be easier?

No - you're exactly right. If the project takes 50 hours to install ... and 4 men to do it ... that is 200 total man hours. Multiplied by the hourly rate (200 x $36.25 = $7250).

That is the same as having that overhead of $290,000 ... and dividing by the amount of AVAILABLE hours in a year. (2,000)

290,000 / 2,000 = $145.





So yes - both methods check out.



NOW ... here's the thing though John ... this thread is not about what to charge for a job.

It is to determine how many sales you will need to make in a year in order to break even.


Your hourly rate (whichever of the above method you choose to use) will arrive at an amount of $7,250

this is your gross profit. I think the word "profit" is throwing some people off. Because you can't go spend your gross profit on a new yacht ... you have bills to pay. You have payroll to meet.

With that said ...

ok ... you have that $290,000 overhead ... (cuz you have 3 guys now)

a gross profit of $7,250 on each job
50 (real) hours per job
you can fit 40 jobs in the year (hang on ... i know what you're thinking)

But, at a gross profit of $7,250 on each job - you MUST have a new job starting after every 50 hours.

If you only do 30 pools in the year ... at a gross profit of $7,250

You will only earn $217,500. You will not break even, in fact, you will go out of business because you can not pay your overhead for that year.


agreed?



Now ... at a gross profit of $7,250 ... and a cost of $40,000 ... this means that you are selling each standard pool for $47,250

Is that competitively priced? I'm sure it is - everyone else is paying somewhat the same costs ... everyone else is paying the same labor


except that they are not. What about the guy with $500,000 in overhead??? Is he going to charge $47,250 for the pool??

Nope. He's probably going to charge $250 an hour. Because while his overhead is different that yours --- he still only has 2,000 hours to work with.

$250 x 50 = $12,500

His project cost is the same as yours - but his overhead is much higher

So he's going to sell that same pool for $52,500

Which means you can add $5,250 to YOUR gross profit ... and sell your pool for $52,500 and still remain competitive.


NOW ... because you raised your gross profit (just because someone else was higher) ...

you now have a gross profit of $12,500

and this is perfectly acceptable ... it is tolerated by your market because the other guy is charging this as well.


Instead of having to install 40 pools to break even and stay in business ... you can now just install 23.2, or 24. Nearly half of what you had to.

You will make the sale - because you are at the same price as your competitor ---- AND you will break even after 24 installs

meanwhile, your competitor is charging his MINIMUM gross profit (12,500) --- and he HAS to sell 40 pools in order to break even on his $500,000 overhead.

You get to break even midway through the year ... and he is sweating until December 31st.


Now -- what he's going to do ... is raise his prices ... b/c he wants to be just like you!!! He wants to break even midway through the year and enjoy Christmas instead of reading the employment section.

SO --- he's going to look at what the guy with the $700,000 overhead is charging...

that guy is on the top of the market. He is the largest company. He has a $700,000 overhead and only 2,000 hours to break even. If he does not, he will lose.

He will make sure that his gross profit is $17,500. Again, he only has 2,000 hours to operate in just like you and the guy with a 500K OH

The guy in the middle will say "hmm ... he's getting $17,500 gross profit on his sales ... I currently get $12,500 and I sweat my tail off all year trying to break even"


So the middle guy increase his gross profit from $12,500 to $17,500 ... He now sells his pools for $57,500

Because he can. His competitor does -- so he can too. That middle guy is no longer sweating til 12/31/07 because now ... he breaks even after 28.57, or 29 sales. He gets to enjoy life midway through the year.


NOW YOU --- yeah, remember you?? You're selling the pools now for $52,500 because you can and are no breaking even at 24 sales.

But you see that those other two guys are selling the same thing for $57,500.

So you add another $5,000. You, as the little guy, are now selling your pools for $57,500

Your costs are still $40,000 --- but your gross profit has increased to $17,500.

You are now marking up your product by nearly 45%

And it is PERFECTLY okay. In addition, you are breaking even at 16.57, or 17 pools.

You broke even at 17 sales and your largest competitor is now sweating until December 31st ... You broke even after the first 850 hours of the year and are now making profit. AND --- you are selling because your price is STILL COMPETITIVE.


So what's the big guy to do?

He has two options

He can *establish* a new gross profit (one that is higher) and will probably succeed because of his recognition and size. People will buy from him, he knows this.

But he'll eventually reach a point in the gross profit where maybe it's not so competitive anymore --- what if none of the smaller guys follow?? What if he has to keep selling his pools for $57,500 just to keep making sales, and thus, break even?


His solution, naturally, is to increase sales. If he has only the capacity to do 40 pools in a year --- he'll only break even and he'll NEVER earn a profit ...

unless ...

he can do 80 (EIGHTY) pools in that year. But - he can - afterall, why does he have such a large overhead??? It's to pay all those salesmen.

he'll sell 80 pools for $57,500, a gross profit of $17,500 and break even halfway through the year ...

he might even LOWER that tolerated gross profit back down to $12,500, still turn a nice profit, but break even a little later in the year ...



im gonna stop here. I have to do something. Like eat.
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Old 02-24-2007, 08:22 PM   #15
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Not even interisted in reading all that!!!!!!
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Old 02-24-2007, 08:27 PM   #16
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


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Not even interisted in reading all that!!!!!!
interested ...



Driftwood - how many jobs do you need this year to break even and start making profit??
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Old 02-24-2007, 10:51 PM   #17
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


Dirt is your profit worked into that 200k overhead or not?
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Old 02-24-2007, 11:45 PM   #18
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


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Dirt is your profit worked into that 200k overhead or not?


my profit --- no

the owner draws that I will use to pay my monthly bills and food and haircuts, ---- yes, that is included in that overhead

my personal bills need to be paid just like my business bills need to be paid.




one thing that might help rusk (cuz I think you've got the jist of what im sayin - judgin by your question)


you cannot make a true profit until you break even


you cannot break even until your overhead has been paid
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Old 02-25-2007, 12:05 AM   #19
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


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Originally Posted by dirt diggler View Post
my profit --- no

the owner draws that I will use to pay my monthly bills and food and haircuts, ---- yes, that is included in that overhead

my personal bills need to be paid just like my business bills need to be paid.




one thing that might help rusk (cuz I think you've got the jist of what im sayin - judgin by your question)


you cannot make a true profit until you break even


you cannot break even until your overhead has been paid

Are you paying youself the same amount that you'd have to pay someone else to do your job??

I really have no idea what your trying to say with this thread. But it seems like it is the combination of severals threads we have had combined into 1.


I figured my hourly rate as my overhead with a 20% MARGIN for profit. Thats divide by the amount of billable hours.

So i guess i need to work 80% of the billable hours before i start making profit.
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Old 02-25-2007, 12:30 AM   #20
 
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Re: Alright Businessmen ... I'm Gonna Give It One More Try ... Breakin Even


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Originally Posted by ruskent View Post
Are you paying youself the same amount that you'd have to pay someone else to do your job??

I really have no idea what your trying to say with this thread. But it seems like it is the combination of severals threads we have had combined into 1.


I figured my hourly rate as my overhead with a 20% MARGIN for profit. Thats divide by the amount of billable hours.

So i guess i need to work 80% of the billable hours before i start making profit.
In this thread, you will find a way to determine your gross profit margin -- which will then be used to determine your break even point.


The thread is long (long as hell) --- but it takes 30 seconds to do, in practice.

you figured your hourly rate as your overhead? With a 20% margin for profit


ok ... i just did the math for that - i see


why do you have a 20% margin of profit??? What makes you arrive at the number "20"

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