Being profitable is more than figuring out your job costs and calculating your rates. It’s also critical to know how much you spend on expenses that aren’t job-related and price your jobs to make sure you’re covering these costs.
The first thing you’ll want to do is figure out how much you’re paying for overhead. Overhead is the amount of money you spend to run your business on costs that aren’t related to jobs. Overhead includes insurance, vehicle costs, equipment, office expenses, accounting, marketing, and more.
Employee wages that don’t apply to a particular job would also count as overhead. This could include the time you or your workers spend doing administrative work.
How do you find your overhead percentage?
Divide your total overhead expenses by your total revenue to get your overhead percentage. You can use a full year of expenses and revenue to get a more accurate number, since many overhead expenses are paid quarterly or annually.
Let’s say that in one year your overhead expenses came to $60,000 and your total revenue was $300,000. To find your overhead percentage, divide $60,000 by $300,000.
$60,000 / $300,000 = 0.2 or 20%
How does that apply to your jobs?
Let’s say you had a job where your revenue was $5000 and your cost of materials and labor was $4000.
First, subtract your costs from your revenue to calculate your margin.
$5000 – $4000 = $1000.
Then divide your margin by your revenue to get your margin percentage.
$1000 / $5000 = 0.20 or 20%
It may look like this job was profitable because you have a 20% margin, but after taking your 20% overhead into account, you actually broke even.
So how do you make a profit?
That’s where markup comes in. Markup is the amount you add to your job price to cover overhead and make a profit.
Let’s say you have a 20% overhead percentage. If you decided you wanted to make a 15% profit, you’d add your profit and overhead percentages together for a total markup of 35%.
Here's a formula to calculate your job price so it includes your markup for overhead and profit:
Job Cost / ( 1 - Markup ) = Total Price
Let’s say your material and labor costs for a job are $4000. To calculate your job price with a 35% markup, plug the numbers into the formula above.
$4000 / (1 - 0.35) = $6,153.85
There may be some situations where you want to raise or lower your profit margin for a specific job. For example, if you’re bidding on a competitive job, you may want to lower your prices by lowering your profit margin in order to win it.
It’s a good idea to review your overhead expenses, margin, and markup on a regular basis. The profit margin that you want and the amount of overhead you’re paying may change over time. For example, you may want to lower your profit margin if you find you’re not getting enough work or raise your margin if you’re booked solid.