by: Captain America
Part of a new series of blog posts from the Super Heroes on the LMN Support Team.
If you’re like most landscape contractors, your end-of-year financial statement could fail to live up to your expectations. The profit you thought you had included in every bid doesn’t materialize on your company’s bottom line. What happened?
There are many reasons for lost profits, but one of them is so simple, you’ll regret every job you’ve priced without it. Most contractors are making a mistake when calculating how much profit margin to add to their bids.
Let’s look at a $10,000 job. You want a 10% profit margin, so you need to add 10% to the job for profit. Your price would then be $11,000 right? Wrong!
The formula for profit margin is this: Your sales price, minus your costs, divided by your sales price. It looks like this:
(Sale Price – Costs of Goods) ÷ Sale Price = Profit Margin
Let’s look at our example again. $11,000 – $10,000 = $1,000. $1,000 divided by $11,000 equals 9%. 9%?! What happened to your 10% Net Profit Margin that you added? The answer lies in the math. Profit is a % of the Selling Price, not the Cost. When you calculate 10% of the costs and add it (as profit) to calculate your price, you aren’t calculating 10% of the selling price, you are only marking up the cost by 10%. The result will be a net profit margin lower than you expected. Add up the costs of this shortcoming on every job you price this year, and you’ll know where a good chunk of your missing profits have gone.
Fortunately, there’s an easy way to correct this problem. LMN’s Estimating software does these calculations for you on every item so you can be confident knowing you are bidding with the correct numbers to reach your profit goal come year end.
In case you want to check these numbers manually, the formula for calculating a true net profit margin looks like this: Total Costs divided by (1 minus Target Net Profit Margin).
Use this formula on a previous example and you’ll see the difference:
$10,000 divided by (1 – 10%) equals $10,000 divided by (1 – .10) equals $11,111.
The fixed selling price of this job is $11,111.
To calculate the profit on $11,111, we do ($11,111 – $10,000) divided by $11,111. $1111 divided by $11,111 equals 10% – which is our desired Net Profit Margin.
Fix the way you add profit to your bids with LMN and immediately see results on your company’s bottom line!
Looking for more information on Profit margins vs Markups? LMN Users get information like this document for free in our system’s library!
