Confusing your projects’ profit margin (gross profit) with your markup can lead to accounting and sales errors – and ultimately your business’s profitability i.e. you might be under-pricing your products and labour, which is eating into your profits. Understanding these two terms is essential – to know that you’re pricing your products and services most effectively, and profitably. Rave Build’s Financial Management System (RAVE’s FMS) does this automatically, and displays these for you clearly with awesome project and business profitability reports – but let’s have a quick look at how gross margin and markup are calculated.

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Profit Margin $ / Gross Profit $
To calculate your profit margin/gross profit, you must subtract the cost of goods and services sold, from it’s sale price. For example, imagine that a product costs $50 to make/buy/produce, and sells for $80. Using this calculation:

Profit Margin $ = Sale price – Cost price
$30 = 80 – 50

This means that it has a Profit Margin (Gross Profit) of $30.

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Profit Margin % / Gross Profit %
Another option is to express the profit margin as a percentage. That is calculating the dollar margin, divided by its sale price. Using the same sale above, with this calculation:

Profit Margin % = ((Sale price – Cost price) ÷ Sale Price)*100
37.5% = ((80 – 50) ÷ 80)*100

This means that it has a Profit Margin (Gross Profit) of 37.5%.

Markup %
By contrast, markup refers to the difference between a product’s selling price and its cost price. It’s looking at the same transaction but from a very different angle. Again, using the same sale above – the item has a cost price of $50, and is marked up by $30, to achieve a final sale price of $80. This can be expressed as a percentage, with this calculation:

Markup % = ((Sale price – Cost price) ÷ Cost Price)*100
60% = ((80 – 50) ÷ 50)*100

This means that it has a Markup % of 60%.

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Looking at the Profit Margin and Markup results in terms of dollar amount, both the profit margin and markup are $30. However, you can see that the profit margin percentage is much, much lower than the markup percentage. Many companies confuse their markup % with their profit margin % – which is disastrous when running a profitable business.

The basis for the Profit Margin % is Revenue/Income, while the basis for the Markup % is Cost. The cost figure should always be lower than the revenue figure, so profit margin/gross profit %’s will always be lower than markup %’s.

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How RAVE’s FMS can help
The key takeaway here is that any business that confuses their profit margin (gross profit) % with their markup %, when pricing up a job, may find itself in the red once all costs have come through. Fortunately, RAVE’s FMS makes this easy to avoid, by allowing you to:

• Easily set (and amend) your expected profit margin (gross profit) per job, per quote, or per item within our Estimate and Quote creation systems

• Automatically track your actual gross profit vs expected gross profit in real-time – with our back-costing reports

• Access FULL company profitability reports for ALL jobs showing gross profit by date range – so you can track company gross profit as well as individual job gross profit

And much more!

We hope that this explanation of profit margin (gross profit) and markup has helped clarify these for you. If you need more clarity on your projects’ profitability and need to add on RAVE’s FMS module to help you keep your jobs (and your business) in the black – please reach out to us via phone 07 210 2228 or help@ravebuild.co.nz.