The Mirage of a 25% Profit Part 3
Profit – that elusive pot of gold.
If you read Part 1 & 2 of this subject series, it is now obvious that to be assured of a profit – you must plan for it. Let’s understand an important certainty.
PROFIT IS REALIZED ONLY AFTER ALL EXPENSES ARE PAID.
Therefore, we must be able to account for all of our expenses. And we account for our expenses when we price our work or the product we provide. I have found the best way to price my work is as follows:
Determine Cost of Goods Sold. Those are all expenses associated with the product. To be clear, if you do not provide the product – the cost for this expense category will be $0.
Know my monthly operational costs (G&A”). These expenses will require payment regardless of business activity. This category should include compensation for managers, accountants – that includes owners who are actively working.
Target a reasonable net profit. My general range is a low of 10% and a high of 20%.
My last major company expended 17% to 20% to G&A. Therefore when the estimator calculated the cost to build (“COGS”), I simply divided the COGS by 65%. Why? Because G&A was 20%. 20% added to 65% left 15% for profit which was a very reasonable amount. Also note, very rarely did my estimators calculate a sufficient number – quite often they were short by 5%.
If you have proper business financials (Profit & Loss and Balance Sheet), it is very easy to price your work and feel comfortable you will achieve a profit. If however, quality books escape you, you must determine a monthly G&A budget through your bank statements – we discussed this in Part 2. With your monthly G&A costs in mind, you ca estimate the bid’s demand upon monthly capacity and generate a hard G&A number to add to COGS. The rest is easy.
Now let’s compare the results of our two bidding approaches.
The COGS is $100,000.
Previously, your bid was $125,000 and, if lucky, you might clear $10,000. However, if you added known G&A to your COGS and aimed for a 12% profit, the bid should be $133,523. The difference is $8,523. That is your money - by bidding the old way you are saying –
“I don’t need that $8,523 – you keep it.”
Personally, I think you deserve it.
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