As they say in the Pink Floyd song “If you don’t eat your beans, you can’t have any pudding, how can you have any pudding if you don’t you eat your beans”.
How can you apply a profit margin if you don’t know how it is built up and ensure it covers all the overheads and the profit you would like to see at the end?
Understanding how your margins are built up is a key to any successful business. Calculating what your margin structure needs to be will decide what sales margin you should be applying to the building projects you undertake. Experience has shown that most builders apply a margin using a figure that is discovered by ‘trial and error’ or they have used one that the builder they previously worked for used. There has been no analysis to work out what is the ideal margin for your business.
A ‘Margin Structure’ is designed to be used to set selling prices for projects or for creating a sales price list for standard designs. Either way it shows how the margin structure is applied to each job and what amounts from the margin are contributed to each area of the business. The ‘Margin Structure’ would be used either by the Accountant or the Estimating Manager in the business to show to the Owner or senior management how and what the sales margins should be. In a previous article, “Profit Margin-How is it Calculated”, I discussed the difference between a ‘margin’ and a ‘markup’. Many builders apply a ‘markup’ believing it is a ‘margin’ when in actual fact they are short-changing themselves on their profit. This article discusses why you should be using a ‘margin’ and not a ‘markup’ to set prices for your business.
The 3C Mentor | Builders Business Resource Centre has a ‘Margin Structure Calculator’ that makes it easy to calculate what your ideal margin structure should be. This calculator uses the overheads and other data to establish the ideal margin for your business based upon your circumstances. The example used in the calculator is ‘derived’ to reach a nice round figure. Yours maybe different. Only by entering your data will you find out what yours should be.
The whole purpose of The 3C Mentor and Alpha Edge is to help create really great businesses in the residential building industry and delivered by our unique ‘Four Pillars to Your Success’ – Business Coaching, Business Consulting, Business Resources and Construction Software.
For an overview of these four pillars go to Alpha Edge here. To find out more about our Business Coaching go to The 3C Mentor here, for further information about the services Alpha Edge can provide go directly to Alpha Edge here and to access the many documents and resources you need as a residential builder, go to our Builder’s Business Resource Centre here. For more information on the construction software and how to ‘Be a Better Builder’, click here
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