net profit estimate profit default profit default profit margin margin adjustment buffer faq My Estimates Are Coming Out With the Wrong Profit Margin. How do I fix?

When estimates come out with a different profit margin than you'd like, it's because your budget is setup with a profit margin that's something different than you'd like.  If your budget it set to a profit margin of 5%, then every estimate you create using that budget will also come out, by default, with a profit margin of 5%.

You want to fix this... and the easiest way is to tweak the sales goal in your Budget so that your Budget P+L.  You want to add (or subtract) revenue from your final sales budget until your company profit margin is what you're targeting.

If you're asking yourself - but wait - why am I doing that?  I can't just change my sales goals, can I?   You can!  And the easiest way to understand why might be to think about how you'd price a job:

  • You’re doing a job – you think the price should be around $10,000 and you want to make 10% profit
  • You do an estimate for the job adding up all the costs – but the costs are a little more than you thought - if you charge $10,000, you’ll only make 5% profit
  • So, to make your 10% profit, you change your price to $10,500 (or whatever) and you’re ready to go.  You don't change the costs of the job to hit the profit target - you change your price.

The way you’d change your price on a job is really no different than changing the revenue targets in your sales budget.  The sales goal is simply not enough (or too much, depending on whether you’re high or low) to cover you company costs AND make the profit you’re targeting.  So – you change your sales goal.

Don’t forget!  Your sales goal was an arbitrary number that you came up with at the beginning of the budget.  Maybe you said “I want to grow by 15%” – or something like that – and presto – there’s your sales goal.  But, now you’ve added up all the costs and overhead in your budget and you’ve realized that arbitrary sales goal doesn’t meet your financial objectives for profit.  So, now you can add (or subtract) sales from your budget to hit your target company profit margin.

But make sure it's still realistic!  After making any adjustment revisit your ratios and your efficiency score.  If your ratios (especially labor and materials) are all significantly under the industry average and your efficiency rating is much higher than industry average (e.g. above 90%), you've got a very aggressive budget.  Maybe one that's not even realistic to achieve.  In this situation, it's likely that you'll have to grow your sales revenue and your costs (labor, materials etc.) - without adding to overhead - until you hit your profit objectives.  It's a slower way to profitability, but at least you're likely to achieve it!

 

If you have questions, be sure to hit us up at advice@golmn.com - we're happy to help look at your budget and make recommendations with you.

 

 

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