Net profit margins

[Buzz]

I never made more than 22% net profit in 7 years of business.

 

The reason the big companies can't operate on lower net profits is because they trade on turnover. In simple terms if you have poop loads of money coming in the banks etc. will lend you money to expand and for operating capital.

[David Riding]

because some folk arent very nice davis, thats why. they will look for oppertunities not to pay you, and reasons to knockyou down even after you have agreed a price. it amazes me that you havent come across this before but on the other hand it is a very pleasant surprise that no one has tried to rip you off especially inb the comercial game:001_smile:

 

I meant why would they not specifically pay for the pipe, not why they would not pay in general.

I have had several atempts to rip me off, the big one was when there was'nt a clear spec of works. Keep your terms and conditions tight and make sure there is a clear specification of work it has obviously helps.

[A_lopa]

I know a guy who has spent a million on kit and most of its rubbish,He ALWAYS goes cheap but makes out ok in the long run by paying low wages.

 

Sadly ruining the whole industry in his area.

[IAN M]

ive never worked out prices with % margins so am i right in thinking it would go like this ie 3xmen £300 1xtruck £100 1xchipper £100 total £500 then your % mark up ?

[Rupe]

No, your mark up is actually contained withign those figures, i.e. the chipper doesn't actually cost you 100 a day and neither does the truck, you charge them out at that much cos of the valuable work they do, they probably cost more like 30 a day each to own and run so thats a good "mark up". The guys are probably closer to 100 each a day so you have less mark up on them.

 

The gross proffit is almost like the average mark up, and can only be calculated after the job is doen and the cost are taken inot account. Mostly you would only get you gross proffit amount at the end of the year from your accountant.

 

Buzz was sayign he "only" ever achieved 22% gross profit which on its own is a meaningless statement. If I had half a million turnover I would be happy with 22% gross proffit. The actual amoun tof your profit is the only thing that matters, not what percentage it is from your gross income.

 

10% of 1 million is the same as 20% of 500K and the same as 40% of 250K etc etc.

 

We all need to work towards getting our highest possible turnover for the employees and kit we have availabel and then either expand or reduce costs in order to increas that bottom line figure. Attaching ourselves to % is not really ideal.

 

In Davids original example its possibel that the pipe laying company marks up its employee costs far less than we do as they may be less skilled, and then they rely on the mark up of the pipe but that doesn't mean they make more than us percentage wise over all.

[woodplans]

My take on it is slightly different to most as we do a large percentage of our turnover from landscaping projects. For these we pay for materials and plant etc. Except we have no real markup on the materials You cannot run an effective Landscape,building or for that matter arb company by relying on mark up to generate profit. It took me a long time to get my head around this after it was explained to me, but the system works.

The most important number you are ever going to need is your cost of being in business..your overhead. As metioned before this includes everything you are spending through out the year to be in business from wages right down to postage stamps and paperclips. Also include for breakdowns and replacement of kit. Only when you no your true costs can you create a profit margin. When you have this number you can then divide it down to monthly, weekly, daily even hourly. Now you can say I want to run my business at a 10%,20%, 25% profit, now add this on to your costs.

What you are selling is not tree work, it is billable hours, and each one of these hours should have a profit attached. This way every hour worked is generating a profit.

When it comes to marking up materials its a difficult topic, but briefly if one month you do a job that has expensive materials which you mark up say 20% you have a good profit month, the next month you work just as hard but use hardly any materials or cheap materials= profits down, but the same overhead costs occured as the previous month, it is far more reliable to be accounting for your profits in your hourly rate than relying on materials etc. This way you know what your profit for the year will be aslong as you can fill the man hours that you are selling.

[Mesterh]

20% is fairly good no matter how small your business.

[Rob D]

I'm not sure I quite get the argument about the pipe layer not getting paid for his pipe and therefore taking greater risk... Most trades I know that use materials charge a deposit before they start work to cover themselves... and they also put a mark up on the materials to the customer...

 

I used to do a lot of turfing... turf cost me £1.70 but I used to charge £2.00 and prior to the job the customer would pay for all turf and materials to be used on the job.

[Quickthorn]

The most important number you are ever going to need is your cost of being in business..your overhead.

 

[...]

 

When it comes to marking up materials its a difficult topic, but briefly if one month you do a job that has expensive materials which you mark up say 20% you have a good profit month, the next month you work just as hard but use hardly any materials or cheap materials= profits down, but the same overhead costs occured as the previous month, it is far more reliable to be accounting for your profits in your hourly rate than relying on materials etc. This way you know what your profit for the year will be aslong as you can fill the man hours that you are selling.

 

Good post.

 

If you're getting through a lot of materials specific to the job, it's important to understand the difference between gross profit and net profit. Gross profit is sales minus cost of sales (ie. all the materials that you use directly for the job..turf, plants, slabs, whatever). Net profit is sales minus all the indirect expenses (ie stuff mentioned already, plus vehicle expenses, paper clips, phone bills etc..everything). I find it's helpful to take gross profit as the starting point rather than sales, because it irons out the ups and downs when the amount of material you use varies.

 

Margins are one useful thing to look at; another good measure only shows up on the balance sheet, and that's owner's equity. How much of your business do you actually own, and is that figure going up or down? If you follow this year on year, you get your return on capital employed. It's worth comparing this to what you would get if you cashed in everything and stuck it in the bank.

[Czlowiek Drzewo]

whats the problem.

 

If you are spending 800 on a job and charging 1000 then you are under pricing the job.

 

if i was going to spend 800 on a job i would be after over 2000.

 

Also spending a lot on turnover is fine if you are wanting to grow your business.