Gross Profit & Overhead Recovery

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Let’s say you’re a business that’s turning a million dollars in sales and that you’ve got a 30% gross profit margin.

At a 30% gross profit margin that means $300,000 is made in gross profit (the profit after all direct job costs have been paid for like labour and materials).

Now let’s say you have a 25% overhead recovery rate.

This means that for every $1 you sell, $0.25 is used to cover your operational costs.

If you wanted to grow to a $2 million dollar business in sales, so double your current turnover, but you want to get there quickly so you decide to shave some money off your quotes… only just 5%…

While you win more jobs, now you’re making a 25% gross profit margin. On $2 million in sales that’s $500,000 in gross profit.

But generally overhead costs are going to grow proportionally with sales because a certain level of overhead will always be needed to support a certain level of work.

With a 25% gross profit margin and a 25% overhead recovery rate, despite doubling in size, the business is now not making any net profit.

This is why it’s critical to understand the money math in your business because if you get carried away going after more and more work without knowing the margins you need to be hitting you’ll likely run into trouble.
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