Think Margin NOT Mark-Up to Increase Bottom Line Profit
  August 12, 2016

Most trade business owners who attend our business training sessions think the only way to increase their profit, and ultimately their personal financial return, is to work more. This is what we term ‘tradie’ mindset thinking, or otherwise known as working harder not smarter. However; rather than thinking how can I do more jobs in a day, in a week, or in a month; you need to start thinking how can I generate more profit from each job.

Every job you undertake requires a purchase of resources in order for the job to be completed. These resources can include materials, equipment hire, fees, consultants, and sub-contractors. In accounting terms we label these resources as ‘cost of sale’ or ‘direct costs’.  To successfully complete the job you are required to plan, prepare, order, store, and manage all direct costs. This takes time, energy, and expertise; all of which needs to be charged to the customer.

Now, to generate more profit from your very next job start thinking in terms of
‘gross profit margin’, NOT ‘mark up’.
We instruct all of our clients to stop using mark up as way of calculating
their charge out for direct costs.
Review the following examples to find out why.

 

Using ‘Mark Up’ to calculate invoice:

Invoice Price Calculation Gross Profit Calculation
Direct Cost Item Cost Mark-Up Invoice Price Gross Profit Calculation Gross Profit Gross Profit Margin
Material $300 15% $345  345 – 300 $45 13%
Subcontractor $200 15% $230   230 – 200 $30 13%
Total $75

 

Using ‘Gross Profit’ to calculate invoice:

Invoice Price Calculation Gross Profit Calculation
Direct Cost Item Cost Gross Profit Margin Invoice Price Gross Profit Calculation Gross Profit Gross Profit Margin
Material $300 15% $353  353 – 300 $53 15%
Subcontractor $200 15% $235  235 – 200 $35 15%
Total $88

 

The Result = More Profit:

  • Mark up is NOT gross profit. Based on the above example an extra $13 gross profit was generated for the job using the gross profit calculation!
  • Let’s say you do on average 6 jobs per week – 312 jobs per year. This equates to an extra $4,129 gross profit per year. All of which drops straight to your bottom line profit!
  • ‘Power of Percentages’ is the true secret to increasing your financial return. In our example if we increased our gross profit margin from 15% to 20% will deliver a massive $15,600 extra gross profit. Therefore for an increase of 5% in margin delivers an incredible 277% increase in gross profit!

You have to agree with the calculations above that you do not have to work more in order to increase profit!

Your Take Away:

  1. Remove ‘mark up’ from all your calculations.
  2. Calculate your direct cost price using ‘gross profit margin’.
  3. Increase your gross profit margin to increase your bottom line.
  4. Get Excited About Your Business!

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