The Mirage of a 25% Profit Part 1
Profit – that elusive pot of gold.
US Invoice Funding is in the business of helping our clients FIND profit. The first step is to know where NOT to look. One of those places lies within your “add on” profit percentage. Many of my service business clients price their work this way – “I tally up what the job will cost and add 25%.” Then they follow up with the refrain – “I don’t know why, but I never have enough to get ahead.”
My first question is “If that is the case, why do bid your work this way/” AND, “why do you continue with the same approach?” Very simply, if it does not work – change.
Why doesn’t this system of pricing work? Well, number 1, it’s misleading. The 25% profit is actually, at best, 20% and it is still only the adjusted gross profit – that means you still have a lot of costs to deduct from it.
Let’s dissect this pricing approach. You price a product or a job request – it will cost you $100,000. This $100,000 is known as Cost of Goods Sold (COGS). You add $25,000 (your 25%) submit the bid and win. Adjusted gross profit is your added 25% divided by the agreed price. That is 25,000/125,000 = 20%.
Now with your 20% profit you have more bills to pay – General & Administrative bills (G&A). G&A is associated with keeping the lights on and doors open. Those bills include rent, insurance, utilities, office products, accounting and legal fees, payroll taxes, etc. For most companies G&A runs 12% to 20% of gross sales.
So, let’s come back to your bid. The gross sale is $125,000. The COGS is $100,000 and G&A is 12%; that means G&A is 125,000 x .12 = $15,000. That leaves you with $10,000 which is an 8% net profit – oh and by the way, did you pay yourself? AND, let’s say you have a cost overrun of 3%, that’s not much, right? No, but your profit is down to $5,000 – you made a whopping 4% profit.
DON’T PRICE YOUR WORK THIS WAY – IT IS NOT WORTH IT – MAKE A CHANGE.
We counsel our clients to become successful and grow. if you want to make that change – if you want your business to grow – stick with us – check out THE MIRAGE OF A 25% PROFIT – PART 2.
View our corresponding video on YouTube!