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In 1992, NSPG released Numbers Cruncher, our Break Even Calculator.  This was followed by our Flat Rate Price Book product line. With our simple-to-use-tools, you can make being a business owner what you always wanted to it be - successful, profitable and rewarding.

Profit, Margin, Markup, and Pricing  
This month we'll get back to basics a bit and discuss a few critical business concepts related to your prices and profits.  Knowing how to do a few simple calculations, and knowing the right calculation to use, can make a big difference to your bottom line.  Even though you probably use a tool like Numbers Cruncher to automatically do these calculations, understanding these concepts will help you to better measure how your business is doing from a profit perspective.

Many businesses set their prices based on Markup rather than the easier to use Profit Margin. This can yield a lower profit amount than they think they are earning because it is hard to tell how much of their sales price is profit.  Let's define Profit Margin and Markup so we know how each is calculated.

Markup: The percentage of the cost price you add on to get the selling price.    Item Cost X (1 + Markup %)

Profit Margin: The percentage of the final selling price that is profit. We'll call this Profit.   Item Cost ÷ (1 - Profit %)

As you may be able to tell from these definitions, a selling price with a Profit will earn in more profit dollars than a selling price with a Markup of the same percentage.  So, using the Profit calculation will allow you to earn the same amount of money with a lower percentage, and you can easily see how much Profit you earn on each job.

Businesses that sell individual things like shirts, hamburgers, or groceries, use Markup because it is easier to calculate a sales price from a cost using Markup. If your markup is 40%, then your sales price will be 40% above the item cost.  They use this method because the money they earn is primarily based on the item they sell and not their added labor.

Service businesses usually use Profit because you can easily calculate profits from a sales total.  Since the costs involved in providing a service can be much more complicated than the cost of selling a shirt, using the Profit percentage method to calculate the profit dollars earned is much easier to understand.  The profit part of any sale is a set percentage of the total selling price.

Let's take a look at how the two calculation methods work.
For example, to set your selling price on an item that costs $100 with a 20% Markup: 

$100 X 1.2 = $120 Selling Price
Profit = $20

To set your selling price on an item that costs $100 with a 20% Profit: 

$100 ÷ (0.8) = $125 Selling Price
Profit = $25

How much profit did I make on that job?

20% profit based on cost (Markup) cannot easily be calculated from your sales figures.  You will need to know your cost for each job, and individually calculate the markup.  Then you can add up the individual markup amounts to see your profit.  There is no simple calculation to show how much profit you made based on the selling price if you use the Markup method.

Profit based on your selling price simplifies tracking the actual profit dollars you made.  20% profit based on Sales allows you to know how much profit you made simply by knowing the dollar amount of sales for a single job or for many jobs over a period of time.  In the Profit example above, it is easy to tell how much profit you made just by knowing the total selling price and your original profit percentage.  $125 X 20% = $25 profit.

Our recommendation to most small service businesses is to keep it simple.  Until you reach a certain size and sophistication, use all of your business costs like labor, overhead, material costs, and profit to set your profitable selling prices.  Accounting for all of your costs and properly calculating your profitable selling price is more important than tracking individual accounting details.

Using a preconfigured software tool like Numbers Cruncher automates the process of setting your profitable prices.  Understanding what you are doing, will help you decide the proper profit levels your business needs to survive and grow. 

- - - - - - -

If you have any questions about these business concepts, give Mike Conroy a call.  He can quickly walk you through the business basics that you need to help make your business more consistently profitable.  Take advantage of his experience working with hundreds of companies like yours to help you achieve your own business success. 

Measure Monthly, Adjust Quarterly
 & Achieve Your Annual Profit Goals

QSC Benefits
QSC will prepare you to run your business more profitably, serve your clients more personally, enhance your business image, and meet the challenges of an ever-changing world.

All members are invited to attend QSC professional education seminars and conferences held throughout the year across North America. Some recent conferences have addressed these topics:

 Finding and Keeping Skilled Employees
 How to Price Your Business
 Client Concerns: Price Versus Quality
 Employee Training
 Business Software: A Review of What's Available
 Financial Management & Analysis
 Expanding Your Company: Is This The Right Time
 Marketing: Affordable and Effective Techniques
 Client Relations Training

The Economy

Kiplinger Magazine has created a series of indicators that provide a measurement of where the economy is.  They're goal is to match real world experience to the numbers, and present them is an easy to understand format.
 

The current positions on all the measures show that the economy is far from recovery even it it appears to be making some progress.  The cut-backs by consumers, business, and government are preventing a robust recovery at this point. Any small increases in consumer spending are being overwhelmed by government cuts, so the economy is treading water, and probably will be for quite a while.

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How's Business?

Nexstar members answer that question two ways:

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Our members have been through the ups and downs and faced the same business issues you're encountering. By joining together in Nexstar's "best practices" organization, they now share, learn, explore and grow - and their business is on a steady upswing - with more time to swing the clubs.

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Others make similar claims. Here's the difference: Members. They own Nexstar. We talk, build a knowledge base of what works and doesn't work, cut out the pitchmen and consult with the real deal experts in fields that matter to members. No gimmicks. No "pre-fab" systems. And no policy requirements that commit you long term. We know your world and speak your language because our members are your peers.

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