Is it a 'margin' or a 'markup' ? I often see builders confusing margin with a markup. If you think you are using a margin but actually it is a markup, then you could be cutting your self out of profits.
A 'margin' is a percentage of the sales price (ex GST or not) whereas a 'markup' is a percentage of the cost price (ex GST or not). The difference in the 'real' dollars can be quite large when it comes to building homes as we are talking about hundreds of thousands of dollars in sales price and cost price.
Knowing your business model and your business plan will help you calculate your sales margin.
The easiest way to demonstrate the difference is with two calculations. Using $100 as the cost price, a 20% markup would be 20% of $100 = $20 therefore the selling price if a markup is used would be $120 or $100 multipled by 1.2.
If a 20% margin is used for the $100 in cost price, the $100 is divided by 0.8 (100 - 20 divided by 100) = $125. If you take 20% of the selling price of $125 you get $25 ($125 minus $25 = $100 cost). For every $100,000 in cost price, you are missing out on $5000 of profit if you use a markup rather than a margin.
Why use a margin?
A 'margin' is also referred to as a 'sales margin' as it is a percentage of the sale price rather than of the cost price. A 'margin' is much easier to use when doing a business plan because in forecasting your activity or sales for the year, you tend to use the selling price rather than the cost price. It is easier to know what the average selling price is likely to be rather than what your costs are going to be.
For example, you are preparing your business plan and forecast you will sell 40 homes at an average selling price of $250,000 (all ex GST of course). This would mean you will have a forecast revenue of $10 million. From here you can identify what resources you will need to sell and complete those 40 homes. Let's say it will cost you $1.5 million in overhead costs (salaries, marketing, office costs, sales commissions, finance costs, etc) and you also need some nett profit for the business to grow and survive, so let's say $500,000. The overheads plus nett profit can be expressed as a percentage of the selling price-in this case $2 million divided by $10 million = 20% margin.
All these forecasts can be started by creating a business model for your business from which you can create a business plan and a strategy.
Bruce Robb | The 3C Mentor - "I Build the Business behind the Builder"
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