Know your numbers
Before you start quoting jobs or trying to win new clients, you need to get to know your business numbers — and we mean know them, inside and out. Understanding your gross profit margin is one of those lightbulb moments that will completely change the way you run your business.
5 numbers every trades business owner should know
The total amount of money you charge for each job.
Cost of Sales
The direct costs you pay to get the job done. This is generally made up of labour and materials costs.
The amount left over after subtracting the cost of sales (direct costs), from your sales income.
The fixed expenses per month that you have to pay, like rent for an office, insurance, loans and utilities.
The money you walk away with once you subtract overheads from your gross profit.
You have to make enough gross profit to cover your direct labour, material costs, and overheads — and still walk away with money in your pocket.
This is where most tradies slip up. They price jobs based on the cost of sales (in other words, the cost of labour and materials), without thinking about all of the indirect costs that come with running a business.
For example, you might charge a job at $100 and spend $80 on contractors and materials, thinking that you’ll make a profit of $20, or 20%. But if you’re paying $30 in overheads, you’ll actually be making a 10% loss — all because you didn’t factor in these additional costs.
In this case, it literally pays to know your numbers!
With every job, your goal should be to generate enough gross profit to pay your overheads and still pocket enough earnings to make it worthwhile to run your business.
Now take a look at this example:
Say you’ve made an income of $100 on a job. You’ve paid $60 for your contractors and your materials, and calculated that another $30 will go to your indirect costs. This means that your overheads represent 30% of your sales.
If you want to make a net profit of 10%, then your gross profit margin should be 40% — $10 for your net profit, and $30 for your overheads.
Take a careful look at your overheads and the percentage these represent in relation to your sales turnover. If you’re tracking your business through a trade job management solution, this should be easy to find in the tool.
A good rule of thumb is to limit your overheads to 25-30% of your sales turnover and have a net profit of at least 10%. This means for every job, you should be adding in at least 35-40% on top of your cost of labour and materials.