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Finding Opportunity in Change - An Outsourced Financial Program

In 1950, an Indianapolis 500 pit stop took roughly 67 seconds. By the 2013 Melbourne Formula One Championship, pit stops were clocking in at 4 to 6 seconds, and that includes changes for all four tyres. The miraculous improvements in speed are a result of incr.....

CFO, Construction - 4 min read

Every business must charge enough to cover costs, add margin and remain competitive. Price your work too high and you miss out on jobs. Drop your rates too low, and you end up working for free.

 

As you know, finding that sweet spot can be challenging. You need a reliable and effective way to price your jobs, which is where markup calculations come into play. With correct calculations, you’ll know that your prices can cover your costs and leave some room to make some money.

 

Let’s look at the right way to calculate your markups. Before you start, make sure you have the following information.

  1. Estimated total overhead expenses for the year
  2. Anticipated total revenue for the year
  3. The amount (percentage) of profit you want to make on your total revenue

 

As you’re calculating your total overhead expenses, include anything that can’t be charged to a specific job, such as salaries, legal fees, accounting fees, insurance premiums, telephones and computers, local taxes, marketing costs, postage, training, rent and license fees.

 

Most of these items are fixed, meaning you spend roughly the same amount on them each month or year. But you may also have some variable overhead costs including vehicle maintenance, equipment repairs and sales commissions, for example. Use historical data to back up your estimates if you’ve been in business for a while. If you’re new, you’ll have to make educated guesses and fine-tune your numbers down the line.

 

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Calculating Markup

To calculate your markup, start with your anticipated total revenue for the coming year, and determine how much profit you’ll need to make on that sales volume.

 

For example, let’s say you need to make a 6% profit in the coming year and you’re shooting for $1,400,000 in total revenue:

Profit = $1,400,000 x 6 per cent ($84,000)

 

Let’s say your fixed and variable overhead costs add up to $285,000. Add your profit to your overhead costs to calculate your total job cost:
$285,000 + $84,000 = $369,000 (total job cost)

 

Next, you’ll deduct your total job cost from your sales volume estimate:

$1,400,000 - $369,000 = $1,031,000

 

Divide total sales volume by total job cost to determine your markup:

$1,400,000 / $1,031,000 = 1.35 (35%)

 

Your markup is 35%. If you calculate your project costs correctly and then apply a 35% markup, you should be able to cover your expenses and still reach your profit goal.

 

This Isn’t a One-Time Calculation

Your numbers can change from year to year, depending on operating expenses, costs of materials, your financial goals and more. That’s why it’s essential to revisit these calculations regularly.

 

Review your actual costs and sales volume at the end of each quarter. If necessary, make adjustments to your markup percentage to stay competitive.

 

Support for Your Business

For assistance with your markup, cash flow forecasting or any other financial issue, get in touch with us at Altus Financial.

 

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