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  • How To Calculate Your Profit Margin

    Posted by J. Larry Bloodworth on April 18, 2022 at 5:22 pm

    This post is in response to a diesel shop that was asking about what he should charge.  My response is below.

    What others charge is not even relevant.   We were (I’m retired since 60, 7 years ago) a transmission specialty repair shop in the greater Salt Lake Market area of Utah.  2015 was the last year I was in business.  We based both parts markup and labor profit to obtain a 60% gross profit margin and a 20% net profit before taxes.   We charged by the job, not by the hour, however, when calculating the job price for a routine repair we used $125/hr. and that was 7 years ago!

    Because of inflation, everybody expects things to cost more.  Right now is an IDEAL TIME to recalculate your prices.  If you’ve read any of my previous posts, you’ll know that on the rare occasion somebody asks how much we charge per hour, I always say, “We charge by the job, not by the hour.”  That worked 100% of the time.

    Take your COST of parts and labor for any given period, the longer the period the more accurate your calculations will be.  Divide that figure by .4 (40%) to arrive at what you should be charging overall.  You can break it down from there.  Continue to monitor and adjust your prices until you reach a 60% gross profit.

    Let’s say your parts and labor costs you $100K in a given period. (month)  Divide that by .4 (40% costs) and that is what you should be SELLING parts and labor for.  EXAMPLE:  $100,000 costs divided by .40 (40%) = $250,000 revenue or $150,000 (60%) gross profit margin.  That sounds like an awful lot, but isn’t really.  All your expenses including rent, taxes, insurance, tools, equipment, etc. all come out of that $150K, so it’s really not that much.

    Others may have an alternative method to calculate your prices, but that’s the one I use in the transmission business.  Many business accounting software packages like QuickBooks and others can help you monitor individual accounts for profitability.  Separate accounts may be higher or lower than the 60% gross profit number but just remember what you really need to track is the OVERALL profitably of your shop target of 60% gross profit.

    J. Larry Bloodworth replied 1 year, 11 months ago 1 Member · 1 Reply
  • 1 Reply
  • J. Larry Bloodworth

    Member
    April 19, 2022 at 9:54 am

    Some accounting software places the labor under expenses, including office payroll.  I need to make it clear the office payroll and technicians’ payroll are in two different categories.  Technician’s payroll us a Cost Of Goods Sold (COGS) account and any office payroll is under an expense account.

    Another is the owner’s pay.  If he/she works predominantly in the shop repairing vehicles, their payroll is a COGS account.  If he/she works mostly in the office, then their payroll is an expense account.  In either scenario, the shop owner’s pay should be commensurate with what a normal employee would be paid for the same job.  The owner’s pay IS NOT the net shop profit. 

    This was a hard concept for me to grasp early on.  In the beginning, I thought my pay was what (if any) money was left over in the checkbook.  Later, I began to think the net profit was my pay.  Much later in my career did I finally learn the concept of my pay should be commensurate with what a normal employee would be paid for the same job.  Throughout my career, I was always learning more and more about accounting and that was a good thing.

    Cheers,

    Larry

    larrybloodworth@gmail.com

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