As an electrician or other tradesman, owning a business can be difficult. Sure, you understand the electrical aspect of the business and even the customer service part. But, when the numbers come into play, things can get a bit tricky to say the least. Your business’s accounting is such an imperative part to its success – after all, a few wrong calculations or incorrect categorization of numbers can result in a massive gap between your actual gross margin and the gross margin you’ve calculated. Since margin and markup are two often miscalculated numbers for businesses, we’ve broken it down for you, so you can better understand these two significant numbers.
In order to understand margin and markup, you need to understand some basic accounting terms. First, we’ll start with revenue. Revenue is the money coming in when you sell your products or services. For example, if you rewire someone’s home or install a whole-home generator, the money from those projects is your revenue.
Next up is cost of goods sold, or COGS. COGS is going to take into account all of your costs that were associated with a project. We’ll use the example of installing a whole-home generator again. Your COGS for that installation project will include the cost of the generator and other materials needed, and also the cost of the labor that went into it.
Last, we’ll cover gross profit. Gross profit is what’s left over after paying for all the costs associated with your project. Referring back to our whole-home generator installation project, your gross profit would be your revenue, or what you charged for the job, minus your cost of goods, which is the cost of labor and materials used for the job.
Now that we’ve covered some of the basic accounting terms, let’s look at how to calculate margin. Your gross margin is the revenue that you have after paying for COGS, but as a percentage. For example:
If you charged $5,000 for your service, but the materials and labor cost you $3,000, then your gross profit is $2,000. To find the gross margin, you divide your gross profit ($2,000) by your revenue ($5,000) and multiply by 100 to get a percentage. In this example, your gross margin would be 40%. This means with this particular type of electrical job, you keep 40% of what your customer pays you. Make sure that when you calculate your COGS, you include the labor you’re paying for, otherwise, your gross margin will seem much higher than it actually is!
To recap, gross margin is:
Revenue – COGS = Gross Profit
(Gross Profit/Revenue) x 100 = Gross Margin
While markup seems similar to margin, it’s not quite the same thing. Your markup is how much more you’re selling your product for than what it costs you. As an example, let’s say you’re selling a generator to someone for $2,000. That’s your revenue. Let’s say for the sake of our example that the generator cost you $1,500. This is your COGS. To find your markup, first subtract your COGS from your revenue to find your gross profit. In this example, your gross profit is $500. To calculate your markup, take your $500 gross profit and divide it by your COGS ($1,500) and multiply by 100. So, for this example, your markup is 33%. That means you make 33% more than what the generator cost you.
To recap, markup is:
Revenue – COGS = Gross Profit
(Gross Profit/COGS) x 100 = Markup
Why Does This Matter?
If you’re making money, you’re making money – so why do these numbers even matter? Well, for starters, they can help you make a lot of different business decisions. For example, if you’re making enough money off of generator installations, but you want to hire additional help, calculating your gross margin will help determine if it makes sense to add another person into the mix (since this will affect your COGS). You can also see which jobs are more profitable, thus helping you prioritize. If your gross margin is 40% on generator installations, but only 15% on rewiring projects, you might consider taking more generator installation jobs and fewer rewiring jobs.
Markups can help you make business decisions too! For example, if you’re an HVAC contractor and your markup on Brand A is 33% but on Brand B it’s only 10%, you might be more inclined to only install Brand A heating and cooling units.
How Can 360e Help?
These calculations, while important, are just a small portion of the accounting involved when running a business. If you need to handle invoicing, scheduling, or any other aspects of your business, it can quickly become overwhelming and take away from the joys of business ownership. That’s where we come in. 360e offers unparalleled management software that is specifically for contractors and tradesmen. We support each aspect of your business, including job management, call booking, invoicing, and more. With our software, you can quote, schedule, track, and bill all in one place! Owning a business is already tough enough; don’t make it harder than it has to be. Get in touch with us today by calling (800) 725-9897, or begin your free trial! Focus on the part of your business you enjoy and leave the rest to us!