Question

When thinking about profit margins -- does the scale matter? If the damages period was 6 months and the incremental volume was 10% of the actual sales, or the damages period was 10 years and the incremental volume would have doubled the plaintiff's sales -- would that matter in terms of how you'd think about what costs are incremental for the purposes of calculating damages?

Answer 1

When thinking about profit margin -- the scale actually does matters as and when we increses the sales turnover we do we increase in profits and this leads to bigger financial statements and increased workload to the workforce of the company.

What if you want a 30% gross margin on the sale? If you mistakenly believe you can get that by multiplying your job cost of $100 by 1.30, you'll get a sales price of $130. Using gross margin properly, divide $100 by .70, and you'll get the correct sales price of $143.

As you can see, how you define the process and the number you're after makes a huge difference in the resultant sales price of your work.

So which should you use? It doesn't matter AS LONG AS you use it correctly. In my opinion, markup is easier to use. It is almost always easier to multiply than to divide, especially when you are with a potential client attempting to make some quick mental calculations.

Let's say you're on a sales call, looking at a job, mentally trying to ballpark the price . . .

Using markup – "The job cost will probably be about $30,000, my markup is 1.60, that's 6 x 3 or $18,000 added to $30,000, the job will probably run about $48,000."

Using the equivalent gross margin – "The job cost will probably be about $30,000, my gross margin is about 38%, round it to 40%, that's 4 x 3 = 12 or $12,000 added to $30,000, the job will probably run about $42,000. Wait! If it's 40% I have to divide the job cost by .60, 30,000 divided by .60 . .

I'm a firm believer in keeping things simple. Gross margin works and will give you the correct sales price, but you are more apt to make a calculation mistake and that mistake can cost you money. In my opinion – use your Markup and Profit, or use your Margin and Lose.

On a scale of 1 to 10, with 1 being the easiest method to compute the sales price of your service or work, markup is easily # 1. Using a gross margin is at least a 6 on this scale and should be avoided. Let your bookkeeper and your CPA wrestle with the math and computing margins, etc. You are not in business to do math problems. You are in business to provide a service to your customer(s) and make a profit doing it.

Remember your markup and how to use it, then put your energy into staying focused on getting to the contract. Stay focused on sales, my friend, that is the way to make it through this crunch.