Understanding Your Margins And Costs Properly

Understanding Margins for Tradies and Builders.

I’m making this video in support of last week’s video where I talked about resisting downward price pressure particularly when everyone seems to think because there’s a pandemic you need to be cheaper.

I want to encourage you to resist that pressure. Watch the video if you haven’t watched it

I want you to maintain your margins because that’s important and it’s important to keep your business healthy.

This video is about understanding margins and your cost properly so you speak from a position of knowledge and confidence when you’re talking about price rather than being uncertain. And know that when someone says, “Your too expensive” or “Someone else is cheaper” or “You need to be cheaper because everybody else is”, it’s good to know whether that’s bullsh*t or not.

It’s my experience and observation from working with lots of tradies and builders that many of you don’t really understand your margins and costs properly.

You have an idea of what margin you have when you’re quoting, but it often ends there or the process around making sure that you did make as much money as you thought you might when you quoted is informal.

What is your margin?

Your margin (gross margin) is the difference between what it costs you to do a job (labour and materials and subcontractors) and the sale price.

You pay for your people who work – your trades people. You pay for your subcontractors, buy materials and then you put gross margin on that and that becomes your price. And this is expressed as a percentage of the sale price. 

That’s important when it’s gross margin. 

If you did a job for $10,000 and labour was $4,000 and materials with $3,000, gross profit then was $3,000.

$4,000 + $3,000 = $7,000

$10,000 — $7,000 = $3,000. 

$3,000 is 30% of $10,000.

Your gross profit is $3,000 and your gross margin is 30%.

And that margin has to cover the cost of doing business.

There are overheads – rent, vehicles, insurance, business coach, marketing, tools, petrol, tolls, parking, phones, internet, uniforms, bookkeeping, accounting, some of your salary if you spend time on the tools and some of your time working in the office, your admin person’s wage, etc.

What’s left after all those costs is your net profit.

And if it’s a dollar value, it’s net profit. 

And if it’s a percentage of your total turnover its net margin.

You have revenue, gross profit or gross margin. Gross profit if it’s a number, gross margin if it’s a percentage (your net margin and your net profit, as well).

What is your net profit?

For most trade businesses, a net margin of 10% is a healthy and normal one and that’s where most of my customers are aiming.

A lot of people aiming for 30% Gross margin, don’t always have one. Lots of people are closer to 20% and lots of people are aiming at a 10% net margin and don’t always make it.

Many I met have a 2% – 6% net profit – net margin. 

Only 10% of the money from every job is actual profit for you. 90% goes to the cost of running the business including your salary for doing the work and it’s a cost, not your profit. You need to have salary and profit. Your profit goes on top of your salary and it’s your reward for taking all the risk, for taking the initiative of starting a business and for going out there and doing all the work — the marketing, etc. 

Don’t forget that profit  (10%) gets chipped away when people make mistakes and you have to pay someone to go back and fix them. When people go over budget and take longer than you allow for in your quote or when they waste materials and make mistakes or when some a**hole doesn’t pay (let’s be honest, that happens) your margins are less than you might think. 

If you gave someone a 10% discount for COVID-19 because they said you should, then you paid everything (as long as no mistakes got made, etc. including a new quote) but you made no profit for the business on that job.

The point I’m trying to make is that a 10% discount doesn’t sound like much, it’s a lot. It’s all your profit.

True cost of employment

Another thing to understand is how much your employees really cost you. 

And I’ve covered this before and it’s covered in my Big Numbers Tracker so I’m not gonna spend ages on it now. You could download the tracker. 

Recommended Reading: True Cost Of Employment (For Trades Business)

If you pay someone $40 an hour plus super, sick pay, holiday pay, and they’re 70% efficient, they cost you a lot more than $40 an hour. 

You add their super (10%) so they’re really costing you $44 an hour but you pay them 20 days holiday and 10 days for being sick and they don’t work. That’s 30 days already and public holidays are probably more like 39 in New South Wales. So there’s 39 days out of the year where you have to pay them but they’re not doing any work. They’re not charged to a job already.

But then you think if they’re 70% efficient on a 40 hour a week, they might spend 70% of those 40 hours actually working on a job and 30% of their week doing other things. There’s two and a half a week – that’s 6% already. 

They do toolbox talks, they do safety briefings, they spend time being inefficient or slower than you might allow in your quotes. They drive between jobs, sit on their phone for a minute or answer the phone and talk to their partner, drive to the hardware store and pick up some stuff that you didn’t allow for in your quote.

This efficiency rating is important. They’re not really doing paid work for 40 hours a week, 52 weeks a year. You’re paying them 40 hours a week 52 weeks a year, but they don’t do work 40 hours a week, 52 weeks a year. 

If you allowed 20-hours for a job, (that’s a small job) or your metered rate includes an allowance of 20 hours, then that’s 2.5 days for one person on an eight-hour day. 

And if they’re 100% efficient, it’s 2.5 days. But it’s more like 3 full days in real life and yet you’ve charged your customer 20 hours and you’ve probably paid your person 24 hours for 3 days.

You see what I mean? 

I hope I’ve shown you that your jobs have a lot less fat in them than you think and that discounting is costly. 

I hope I’ve also shown you these people cost you more than you think which means discounting is costly.

What you should do of course is download the Big Numbers Tracker and start thinking about your pricing and your readiness to discount.

And when somebody says you need to discount, understand what that’s going to do and understand what your costs really are when you’re considering whether you should discount or not.

Another thing you should do is set your systems up to actually measure this so that you really know, so that when some prick says, “It’s COVID, I’m going to need you to help me out here”, you know what that means to you and you know what’s going to happen to your numbers and your costs if you start knocking some money off the top.

If you want me to help you with this (I do spend time with my clients helping them be strong, and resist price discounting and helping them set their actual pricing appropriately so their business runs profitably all the time)  book a 10-minute chat because that’s business coaching.

You should book a 10-minute chat. We’ll work through the process together. We’ll decide together whether business coaching is the right thing for you. 

If you don’t want to do business coaching,  make sure you charge enough to run your business profitably.

There are four ways you can engage with me:

1. Subscribe to these emails and get them once a week in your inbox so you never miss a video from me.

2. Join the Trades Business Toolshed Facebook Group where you can watch these videos, ask me questions or talk to your peers.

3. Attend my next Tradie Profit Webinar.

4. Book yourself a 10-minute chat with me. We’ll talk about whether coaching is right for you now and if it is, we’ll go further into the process before you have to make your mind up.

See you later.

Click here to book a money maker call with Jon.