Calculating Profits and Setting Profit Goals
A discussion of how profit is measured, and how to set realistic profitability targets. February 10, 2009
Question
I am doing cabinets and custom furniture and I’ve been struggling with what is a good percentage of profit to shoot for when pricing my work. I have no problem figuring material, labor and taxes. I need help to figure the amount of profit! What do you guys get 10-20-40%? I have not a clue.
Forum Responses
(Business and Management Forum)
From contributor J:
25% for me, but don't forget overhead.
From contributor O:
It might help to be more specific about what you mean by "profit." An accountant calculates profit by subtracting overhead, materials and whatever you pay to employees and subcontractors from whatever you got paid, while an economist would take that number and subtract whatever you pay yourself for your time and effort. Economic profit is basically the amount you can afford to reinvest in the business rather than buying hamburgers or paying the electric bill. It's possible to make a profit in the eyes of an accountant (and thus have to pay income taxes) but still not be making an economic profit (and thus feel like you're not "getting ahead").
From contributor L:
We shoot for 14% overall, but will price higher or lower based on what the market will allow. Profit is after all costs, including your wages! If you are trying to grow a business that takes ney too (additional profit.) Don't forget to include all your costs (equipment replacement) and a safety margin. There will be years when you lose money too!
From contributor A:
We shoot for 20%. Less than that and I can sell everything and invest it. I'm still getting around 12% return on investments. I need to account for financial risk on the shop over the bank. So I shoot for 20%.
From contributor I:
I'd guess you are talking about mark up/gross profit instead of net. I figure my cost of materials plus labor cost and double that for a selling price. Net profit will depend on a lot of other factors.
From contributor D:
Whatever's left. Seriously, you will look for a different percentage of your gross depending on the type of operation you run with. Your profit (after tax) should be more than what you need to take home. Start with that figure, work backwards and add the costs (all of them) to come to the revenue required to make ends meet. If you start this way you will come to an understanding that 40% of not enough is, well, not enough.
From contributor W:
Since you are asking about pricing, you charge what the market will bear. Treating what you do as a business means paying yourself an appropriate salary, though it may be on the modest side. Since it sounds like you have a small business - just you, shoot for 20+% after every single expense is paid, including your salary. As you establish your reputation, you will have more flexibility in what to charge. Starting out, you may not be able to charge that amount right away.
From contributor G:
I noticed that no one has discussed margin versus mark-up. Some threads imply they are looking at net margin ((Gross revenue - all costs)/gross revenue). Many of my woodworking colleagues locally don't understand the difference. Mark-up is what is added to input costs. For instance, $100 cost marked up 50% equals a sale of $150.00. $50.00 gross profit divided by the sale of $150 gives us a margin of 33%. It is much simpler when calculating profit to consider only margin. I alter my margin from 15% with solid contractors to 33% on highly custom work. Whatever the market will bear.
From contributor H:
Pricing is tough not only because of the variables but what the consumer is willing to pay often can deter what we can charge.
From contributor J:
I agree with contributor B about the customer factor. Most of these guys claim to be inflexible though and unaware of supply and demand pressures so thereby charge their weight in gold or else.
