Markup and Margin: Where renovation companies go to die

The difference between markup and margin is so important – in fact, it’s critical – that if you don’t get it, you will always have trouble growing your company.

Only you can decide how much money you need to make. But I can tell what is NOT enough: “10 plus 10” (10 per cent on top of costs for overhead and 10 per cent for profit).

Ten per cent overhead is never enough. Overhead includes such items as cellphone, all your insurance, workers comp, depreciation or lease costs for all vehicles, fuel, machinery and tools, computers, bookkeeping, accountant, lawyer’s fees, office rent (even if you work out of your house), office supplies, internet, and on and on. Overheads can add up to 25 per cent to your costs, not just 10 per cent. Add all those things up yourself, and see how much they really are.

As for profit, I am convinced that 15 per cent profit is attainable and realistic.

But if you are still confusing markup and margin, it hardly matters what you think you can earn, so let me explain the difference:

If the project cost you $7,000 and you mark it up by 43 per cent (or multiply it by 1.43), you will sell the project for $10,000. Your gross profit is $3,000 ($10,000 – $7,000). So what percentage is the Gross Profit? Here’s the formula: Gross Profit ($3,000) divided by Revenue ($10,000) equals 30 per cent. Your Margin is 30 per cent.

So, if you Mark Up by 43 per cent, you get a Margin of 30 per cent. Marking up your costs to get your price (Markup) is not the same at all as what is your Gross Profit (Margin).

Not understanding this principle is the single biggest reason that small business people don’t make enough money. They underestimate their need for markup, thereby shrinking their margins.

Here is a chart showing the difference between markup and margin.

Margin Desired         Markup Required

(%)                              (multiply your costs by)

10                                1.11

15                                1.17

20                                1.25

25                                1.33

30                                1.43

35                                1.54

40                                1.67

45                                1.82

50                                2.00

60                                2.50

70                                3.33

80                                5.00

90                                10.00

You can see that if you are looking for a 40 per cent Margin, for instance, you need to Markup your costs by 67 per cent, or in other words, you have to mark up the costs by 1.67. Similarly, if you Markup your cost by  by two, you will realize a 50 per cent Margin.

There is a lot more to know about accounting and finance for small renovation companies, but start here, and get this right first.

Mike Draper is the president of RenoVantage. RenoVantage coaches a number of renovation and homebuilding companies to growth and prosperity. You can reach Mike Draper at mike.draper@renovantage.com