Revenue and profit are two significant indicators of your business’s financial health, but they mean two different things. Revenue indicates the income being generated by the sale of goods and services from your business. In contrast, profit is the remaining amount AFTER business expenses, debts, and costs to operate the business are taken out.

So, while revenue is a good indicator of a business’s financial health, profit is where it really counts. Is your business turning a profit? Use our calculator to find out.

Use our FREE Profit Margin Calculator to measure your business’s profitability – It does the work for you! Here’s how your profit margin will be calculated:

Profit margin = [Price for Services – Costs (which is Overhead costs + Labor Costs + Material Costs)] / Price for Services x 100

A good profit margin really depends on the industry. However, an average profit margin is around 10-12%, while a profit margin of about 20% is very healthy.

Here are a few average profit margins by industry:

– HVAC: 12% Net Margin
– New Home Construction: 25%
– Graphic design: 20%
– Construction: 10%

– Source: Margins by Sector – January 2022 | Profit Rhino

You know your profit margin. Now what? If your profit margin is below 20%, you may be thinking of ways to improve it.

Here are a few ideas to help you get started:

– Increase Your Prices
– Employ a Hard-working Team
– Use Professional Estimates & Invoices
– Create a Loyalty Program
– Improve Customer Retention
– Eliminate Low-performing Goods
– Increase Brand Awareness
– Negotiate with Suppliers

Imagine you’re a wedding photographer. You have overhead costs like maintaining your expensive camera equipment. So, you may choose to pass along some of that cost to your customers. Additional costs include the labor of hiring a second photographer to help you capture the big day and materials costs, such as SD cards and lens wipes that can pop up at any time.

Here is how you would reach an over 30% profit margin:

[$3,000 Price for Services – Costs ($700 equipment overhead + $1,050 subcontractor labor + $250 materials costs )] / Price for Services x 100 = 33%

When you know how to calculate profit margin, you see how much you are REALLY making. In this case, you only take home $1,000 from your wedding photography gig. The other $2,000 went to costs. If you wanted to increase profits, you could cut your costs or increase the amount you charge customers.

What’s an overhead cost, and how does it affect me as a freelancer or small business owner?

Overhead costs are ongoing expenses necessary to operate your business and keep it running. It does not include the products or services sold by your business, only the expenses that support your business.

To name a few:
– How much it costs to rent your space
– Office supplies needed
– Labor costs of employees
– Utilities like water, gas, and air

For a small construction business, overhead costs can look like:
– The tools and equipment you use
– The truck to haul your equipment
– Inspection fees to check your work
– Lunch, if you decide to buy food for the crew

To calculate overhead costs, simply add together all the things you need to spend money on to run your business. You may choose to look at this on an annual or monthly basis.

EX: To calculate your overhead cost, simply add together all the direct money you pay to run your business. Before starting a business, find out how much it will cost you to run your business on a monthly and annual basis.

If you want to start a daycare, you will need to understand your monthly costs before you are able to determine the profit you can make. In a month, you might pay $1k in rent, $150 in utilities, $900 in labor costs, and $200 in fuel costs. $1,000 + $150 + $900 + $200 is your overhead cost this month.

Labor cost is the sum of all wages paid to your employees, including the employees’ benefits, payroll taxes, and insurance paid by you, the employer.

Knowing the number of gross hours your employees work each year will help you calculate your labor costs. Add together how much you will need to pay each of your employees if they work 30 hours per week or 40 hours per week. Consider the insurance, benefits, and overtime pay each employee will require and factor these into your labor costs.

Profit Margin is revenue generated by sales minus the price of goods sold. Markup is the price spread between the cost to produce a good or service and its selling price.

Three factors go into Markup: Overhead, Labor, and Materials

Markup = Gross Profit [Job Cost ($) + Overhead (%) + Profit (%)] x 100 [Job Cost]
Remember, Costs = Overhead costs + Materials Costs + Labor Costs

A Markup can vary depending on the contractor and the project. Typically, the markup on materials is between 7.5%-10%.

Say you paid $50 for paint supplies to paint your customer’s bathroom. You may choose to ask your customer for $55. That is a 10% markup.

According to the Corporate Finance Institute, some contractors will mark up materials as much as 20%!

Take the example above, where you paid $50 for paint project supplies. If you wanted to apply a 20% markup, you would charge your customer $60 for materials instead.

Some general rules when it comes to markups:

Adjust your markup based on the length of the job.

“There is no industry standard for labor markup or a set hourly rate. Areas with high costs and complex regulations, like New England and California, will likely see higher labor markups than the Midwest. With hourly labor, it’s important to set expectations and milestones (for the worker as well as for the client), as each hour over the budgeted work will diminish profits.” – Source: https://www.angi.com/articles/general-contractor-markup.htm