How do you estimate you profit to succeed? What an interesting question and I be you have your own system but I get many interesting answers when I ask that question. My friends over at www.virtualcontracting101.com sent me some information that I would like to share with you. Take a look at their approach.
The first piece of information you need to enter into the formula is the total costs to keep your doors open. This includes all your overhead costs. Unfortunately, most people forget things like taxes, depreciation including replacement costs of equipment that may need to be replaced.
You also need to add how much profit you want to make before the end of the year. Don’t forget vacation pay and any goodwill donations and public relations expenses.
If you have been in business for several years you should be able to pull most of this information from your accountant or from your company’s previous years’ tax returns. The newbie that is just starting a business can use the “WAG” (Wild Ass Guess) approach. The important thing is to give some serious thought about what is needed each year to keep the doors open.
The second item that must be entered into the formula is the percentage that you can make from each project. This figure will vary depending upon the market and how tough your competition is.
If your competition is hungry; the percentage that you can mark up is going to be low, however, if they are fat and don’t need the work you are going to be able to add a higher mark-up. Sounds simple and it should be, unfortunately, there are all kinds of things that things that can blind side you and make you lose a potential opportunity. Most of these issues can be minimized if you know your hunting area and competition and this subject is addressed in another segment.
The quick formula that I recommend is:
Total costs/(1 – Percentage or mark up)= X or total amount of work needed
For our example I’m going to use a mark up of 10%
$100,000/(1 – .10) =Amount of work needed
100,000/.9 = $1,111,111.00
I know that this is very simplistic and I am only offering it as a quick tool for you to use. I certainly do not intend to insult your intelligence but it is amazing that the number of people that I talk to cannot give a quick answer to the amount of work they need to keep the doors open and make a profit.
You can use this reference tool to estimate how much you need to target each year. After you reach your target amount you can kick back for the rest of the year or dig in and begin to make real money!
Take a look at this short video to get a better idea about what I’m talking about.