FINANCIAL MANAGEMENT - MARKUP
Dont confuse markup with profit. If you want a certain percentage of profit and you estimate your costs and add the desired profit percentage as markup, youre making an error. Your profit should be a percentage of the selling price, not a markup on cost.
To determine markup (and profit):
Example: Cost of job is $100,000. Desired profit percentage is 15%. Subtract 15% from 100%. Balance is 85%. Divide 15% by 85%. Quotient is 17.65%. Multiply $100,000 by 17.65%, or .1765. The result is $17,650. Estimated selling price of $117,650 gives you a 15% profit.
By using this formula, you will see that a profit of 25 percent on the selling price is greater than a 30 percent markup on cost.
NOTE: For other closely related topics, be sure to review the section on Job Costing (#51 & 52), and Profit (#55 - to be published later) in this series of articles on Financial Management.
Mike Holts Comment: This newsletter was extracted from my Business Management and Management Skills Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com.
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