| Markup versus Margin |
| In our previous article, we stressed the importance of accurate accounting and financial reports. In future articles, we will talk about taking the information from those reports and calculating gross profit margin and a plan to Increase a profit. But, before we begin our discussions about ratios, we would like to eliminate any confusion about Markup vs. Margin. |
| Markup is a calculation based on cost |
| Margin is a calculation based on sales |
|
| Markup versus Margin |
| Markup % |
= |
Gross Margin % |
| 15% |
= |
13% |
| 20% |
= |
16.7% |
| 25% |
= |
20.0% |
| 30% |
= |
23.0% |
| 33.3% |
= |
25.0% |
| 40.0% |
= |
28.6% |
| 43.0% |
= |
30.0% |
| 50.0% |
= |
33.0% |
| 75.0% |
= |
42.9% |
| 100.0% |
= |
50.0% |
|
Many contractors estimate their selling price by applying Markup to their hard costs and calculate their overhead as percentage of sales which is Margin; this could lead to accepting unprofitable contracts. |
| The terms markup and margin are often used – or misused – interchangeably. Let’s look at markup and margin using simple numbers. If you take a $1000 item and mark it up 50% to arrive at a $1500 selling price, your profit is $500. Margin is the part of the selling price that is profit, so in this example we can see that a 50% markup results in a 33% margin ($500 profit is one third, or 33% of the $1500 selling price). |
|
| Now let's look at this equation as it relates to your business using more realistic numbers and considering overhead. A contractor is estimating a jobs hard costs to be $10,000 and overhead costs to be 20% of the selling price. This contractor decides to markup the job 25% thinking the result will be a 5% profit, but this will result in just breaking even. Let's look at the math… |
| $10,000 |
Direct Costs |
$12,500 |
Selling Price |
| $2,500 |
25% Markup |
x 20% |
Estimated Overhead % |
| $12,500 |
Selling Price |
$2,500 |
Estimated Overhead |
| $2,500 |
Gross Profit |
$0 |
Net Profit |
| Margin = Gross Profit ÷ Selling Price ($2,500 ÷ $12,500 = 20%) |
|
| This is the result of this contractor basing selling price on markup of job costs and estimating overhead as a percentage of sales (margin). |
| Understanding the difference between markup and margin will give you the ability to determine which jobs have profit potential and which ones you should pass up. |
| Donna Caswell, President, On Track Business Management, Inc. |
|
|
| With 20 years experience as a financial manager, trainer, certified consultant and business coach, Donna Caswell |
| helps contractors redefine their businesses to recognize opportunities and revenue growth. |
 |
| Donna is a Certified Sage Consultant with expertise in Sage Master Builder and Sage Timberline Office. |
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