Go Beyond Breakeven and Make a Profit on Every Job!
By Vicki Suiter
To be profitable, a business must charge more than its breakeven point for the services it sells. When it comes to pricing a project, a contractor is often hindered from applying the appropriate markup for overhead and profit by considering what is being charged by competitors who do not take these things into consideration. This is called “low balling,” and does not contribute to long-term business success. If you are going to cut your prices, do so with your eyes wide open. You want to be clear about what you need to mark up to cover your overhead, and this article will show you EXACTLY how to do that! Most of us know that overhead is the cost of running a business and includes items such as rent, utilities, office supplies, staff and officer compensation. What you may not know is that many people actually use the incorrect figure from their Profit & Loss Statement to calculate it! When you know your correct overhead markup percentage, you will know exactly how much to mark up the cost of goods or direct expensesto break even. Any markup after this is profit. By using the correct overhead markup percentage, you will produce more consistent results, AND, set up jobs from the start to be profitable. To calculate the overhead markup percentage for your company, take your overhead expenses (generally six months to one year) and divide that amount by the cost of goods sold for that same period of time. The formula is: Overhead Expenses $ ÷ Cost of Goods Sold $ = Overhead Markup % Another common mistake is not including liability and worker’s compensation insurance in your cost of goods sold. Below I have illustrated where to look to get the figures for calculating overhead breakeven percentage, and following that is an illustration of how to apply that information in your bidding. Example Company Profit & Loss Statement Jan-Dec 2009
|Cost of Goods Sold||$ 1,700,000||70.54%|
|Gross Profit||$ 710,000||29.46%|
|Overhead or G&A Expenses||$ 500,000||20.75%|
|Net Pre-tax Profit||$ 185,000||8.71%|
Overhead Expenses/G&A Costs $ 500,000 Cost of Goods Sold/Direct Costs ÷ $1,700,000 Overhead Breakeven Percentage = 29.41% In the example above you would need to mark up cost of goods sold by 29.41% to cover overhead costs. Marking up cost of goods by this the overhead markup percentage will cause you to just break even. In other words, it will produce just enough money to cover your overhead but not make a profit until you markup your costs by more than that overhead breakeven percentage. NOTE: If you are a sole proprietor, your percentage will be lower since you do not have officer compensation on the profit & loss statement. To calculate a more accurate breakeven point, add to overhead expenses an amount for your personal compensation. The clients I have worked with over the years who apply these strategies know when to take a project and when to walk away. Now, more than ever, it is critical that contractors bid work with the understanding about how that project is going to affect their bottom line. It no longer works to just assume that if you don’t make money on this project, you’ll make it on the next one. Start checking your numbers for estimated profit and start going beyond breakeven! In summary – here are the steps to follow for going beyond breakeven and making a profit on every job!
- Calculate your company’s overhead breakeven percentage.
- When bidding work, start with accurate cost basis (NOTE: if your costs include some markup for labor, then net the figures out to be the actual costs for this calculation)
- Mark up costs be enough to cover your overhead AND make a profit
Once you have these numbers then you will be armed with the information you need to make decisions about pricing a job with your eyes wide open! You will have the clarity to choose from an informed place just how much you can cut your prices before you start losing money.