It’s that time of year that we’re all looking back, trying to learn from the past, planning for the future, and a thought about profit margins came to mind.
Let’s say you track a $20,000 job very carefully. Your overhead and hard costs for that job totalled $15,000.
That leaves $5,000 as profit for that job, right?
So when you start looking at your profit margin as a percentage, that $5,000 could be seen as 25% of the total revenues generated from that job, or as 33% of the cost of completing the same job.
I could give myself a headache pretty quickly trying to work through this, but what do you think? Do you look back at your profit margin in relation a percentage of hard costs? Or as a percentage of total revenue?
Brinkmann for President in ’04
Replies
I reckon in the example given that most people will think that the figure is 25%. Does the overhead include all the labour costs, if yes then I would say it was net profit before taxes.
John
25%. Always use the larger number as the denominator. By the same token, if you are marking costs up by 10%, DON'T multiply by 1.1; always divide by 0.90.
That's the way it is supposed to be done.