Have you ever wondered why you’re working so hard, yet you seem to be struggling to break even each month?
Are you charging yourself out for a good hourly rate, and putting 20% on all purchases, yet you still don’t have any money in the bank?
The likely culprit is that your Margin is too low.
Many landscapers, me included for a long time, assume that placing a good mark-up on materials, and charging a decent labour rate will be enough to see the money rolling in. Wrong! Running a business, especially a landscape business, is a little more complicated than that. The only way to ensure you will make a profit is to ensure your Overheads are covered & a profit margin is built into the sale price.
There are two ways to cover Overheads. Our previous article, entitled “The Cost of Landscape Labour”, explored the option of adding Overheads to the labour rate, the alternative is to spread them over the whole project as a Margin.
Knowing your margin is KEY.
This article gives you the tools to work out your own margin, and explains the difference between Margin and Mark-Up.
Understanding Margin & Mark-up
Let’s first understand the difference between Margin and Mark-Up, because if you’re not an accountant this stuff confusing!
Mark-Up – Mark-Up is a percentage placed on the cost price to get a selling price.
Example: an apple that costs $1 has a mark-up of 20% is then sold for $1.20 (excluding GST).
Margin – Margin is the percentage difference between the Cost price and the Selling price, which is gross profit.
Example: An apple that is sold for $1.20 and cost $1, the margin is 16.7%.
To add the cost of Overheads to an entire project we must first understand what percentage of turnover (the amount of money charged by a business in one financial year) are overheads (your accountant should be able to tell you this). A typical landscape company runs on overhead of 15-25%, so today we will use 20% as an example. With 20% of turnover being overhead cost, then if we wanted to make 10% profit we would need a 30% margin on the sell price (this is 30% gross profit, to make 10% nett profit). Taking the apple example above, $1.20 would only give us a 16.7% margin, which would not cover our overheads, let alone make us a profit. Selling the apple for $1.20 would cost us money!
Step 1. Work out your Overhead costs as a percentage of annual turnover. Ask your accountant, business coach, or sit down a do the numbers yourself.
Step 2. Decide what percentage nett profit you would like to make.
Step 3. Combine these two numbers to set your Margin. 18% Overheads + 10% Profit = 28% Margin
This is how you apply the Margin to the project you’ve just priced:
If we know our Cost Price and we know our Margin, this is how we work out the Sell price:
Example: Tim from Tim’s Landscapes knows the overheads for his landscape business is 20%, and he aims to make a 10% profit. Tim has priced a project with a cost of sale (the raw costs to build the project, including materials, labour, plant and subcontractor) $100,000. Tim now wants to work out his sell price. He knows he must have a 30% margin on his sell price in order to cover his Overheads and make a 10% profit. Here is how he works out what he will charge the client.
If we know our Cost Price and we know the Sell price, then this formula shows us the Margin:
Example: Tim knows the cost for the project is $100,000. He has placed a range of mark-up on different items (e.g. 50% on plants, 60% on labour, and 20% on materials) to arrive at a sell price of $145,000. Tim wants to make sure the 30% profit margin he requires is covered in that price. The calculation below shows that Tim is covered, with a margin of 31.04%. This leaves Tim with a nett profit of 11.04%, if all goes to plan on site.
On a project where labour is low and material costs are high, Tim might find the calculation above revealing a margin of less than 30%. If Tim’s margin drops below 20% not only is ne not making any profit, but it is actually costing Tim money to do the work. In this situation, Tim should increase his Mark-Up on materials until his Margin is reached.
Knowing your overheads is key, don’t sell yourself short, you must get paid in full for the good work you do!
Whether you add Overheads directly to labour, or spread them out over the whole project as a margin is up to you, as long as you add them you will be well on your way to making a profit.