This table demonstrates the relationship between gross profit and the number of projects you'd need to complete to cover an assumed overhead of $150,000 and achieve a net income of $85,000. Raising your gross profit margin from 20 percent (line 1) to 33 percent (line 3) slashes the number of projects from 42 to just 17 - while generating the same profit. To plug in your own company's numbers, go to the Business Technology forum at jlconline.com and download the Excel workbook used to create the tables in this article.
Let's begin this month by reviewing some basic financial concepts and benchmarks. Out of your total sales revenue you subtract the costs of goods sold (COGS), also known as your "direct construction costs" - the labor, materials, and subcontracts required to complete the project. What's left "above the line" after subtracting those direct costs is your gross profit.It would be great if you could just pocket your gross profit, but unfortunately you still have five major expense categories to pay for:
• Sales and marketing (advertising, sales commissions, marketing efforts)
• Warranty and customer service liability
• Financing (lines of credit and construction...