How to figure profit?

[Hunter58]

Cogs is the sum of direct labor + materials

[ctom87]

I have a little woodworking hustle on the side.

Just starting out so I charge material plus 10%(covers glue, pads, screws, sandpaper, etc) plus $40/hr. Eventually, I would like to get up to $80/hr.

I needed to hear this!!! Good advice.

[hpdrifter]

I think Cost of goods sold = direct labor + direct material
not in addition to.

never mind........already answered

[JBJTX81]

Gotcha - cost of goods sold is a subtotal of various expense line items.

[ecallarman]

Cogs is the sum of direct labor + materials

You are correct. that's what I have in my example. My example might be a bit misleading because I used a "-" in front of the amount, but it wasn't to indicate a deduction but rather just a space in between the dollar amount and the description. The red font indicated a deduction for the direct labor and direct matls, and the red & bold font indicates a subtotal of the two line items above (DL & DM).

[TxStrong]

Take a look At "Profit First". This system has been great for our small business.

[rut-ro]

In my opinion, Figuring profit is actually very simple and can be as simple or granular as you want. In your case I would suggest the keeping it simple. Below is a simple example.

Sales Revenue $300,000
Direct Labor -$100,000
Direct Materials -$100,000
Cost of goods Sold -$200,000
Gross Profit $100,000/ 33%
Operating expenses -$50,000
Net Profit $50,000/17%


As far as figuring out how to estimate a project that encompasses profit, I would suggest considering the following estimate example You can adjust the billing rate and materials markup as you see fit, or your market will allow.

Labor- 24hrs X $60.00 = $1,440.00 (Billing rate would include overhead and profit)
Materials- $500 X 20% markup = $600.00 (Markup would include overhead and profit)
Consumables- $100 X 20% markup = $120.00 (Markup would include overhead and profit)
TOTAL - $2,160.00

Now, let's take a look at you hypothetical profit on that estimate.

Revenue= $2,160
COGS (Direct labor @ $35/hr & cost of matls & cons) - $1,440.00
Gross Profit=$720/ 33%
Operating expenses (expenses that are not 100% attributable to this one job and are associated with operating your business year-round) -$360

Net Income/Profit (gross profit minus operating expenses)= $360/17%

This has some good info. Thanks for taking the time to put it all down

[rut-ro]

Alright narrowing it down to a couple options. Now a couple more questions.
1) if it’s a side business should I go the LLC route ?
2) I know many people have side business that are cash related so I’m assuming people don’t pay sales tax on money they make. Would this be a question for a cpa to answer? Not trying to make 100s of thousands. Just about 10-20k a year to waste on my hobbies.

[texas shag]

I an a partner in an engineering firm with about 50 employees. We are almost strictly intellectual capital, but we do have to cover rent, utilities, hardware and software as overhead costs. Additionally, we cover an accountant, HR and marketing professionals on staff, which are 100% overhead costs. We have a pretty deep understanding of how billiablw certain types of employees should be, and can therefore calculate our our overhead expenses fairly easily. From this we derive our break even multiplier.

When we quote a job, we build our fee with the hope of making 30% profit. As the job goes on, scope creep happens, or sometimes we may have missed a bit on our initial estimate. So at the end of the year, we end up at about 20% profit on revenues, which is short of our goal but still a decent chunk of change in the bank.

That is all just to say don’t undervalue what you are doing, and know that it will almost always cost you a bit more to do it than you think, so with healthy margins you should still make out ok.

[Neuse]

In an 8 hour day, how many hours will be pure production.
My guess is 5.
There is always time lost answering the phone, servicing equipment, picking up materials, delivering finished product, etc.

[RR 314]

Alright narrowing it down to a couple options. Now a couple more questions.
1) if it’s a side business should I go the LLC route ?
2) I know many people have side business that are cash related so I’m assuming people don’t pay sales tax on money they make. Would this be a question for a cpa to answer? Not trying to make 100s of thousands. Just about 10-20k a year to waste on my hobbies.

Talk to a CPA. The question posed is a bit confusing. A GOOD CPA will get you squared away. You are asking about paying sales tax "on the money they (you) make." I think you mean income tax. Either way, talk to a CPA. I do an LLC on all entities.

[RiverRat1]

CPA for sure.

As far as the OP.. Why not charge what the market will bear? Then you keep track of every expense and you'll know your profit.

I've seen a few times people charging what they think others want to pay or are willing to pay. They are usually way way too low. You give speed and quality where others do not (and reliability) and people usually pay a lot more. Obvious depends on who/what market your in though.

Just know your customer. Talk to them. Take them to lunch. Make it so that if you really are too high they will talk to you before going elsewhere. But be better than your competitors so even if they do leave they'll come back. You'd be surprised how stupidly companies are run with lack of customer service, bad service, bad quality work, not showing up on time, etc..

[rut-ro]

Talk to a CPA. The question posed is a bit confusing. A GOOD CPA will get you squared away. You are asking about paying sales tax "on the money they (you) make." I think you mean income tax. Either way, talk to a CPA. I do an LLC on all entities.

Correct. Will do thank you

[rut-ro]

CPA for sure.

As far as the OP.. Why not charge what the market will bear? Then you keep track of every expense and you'll know your profit.

I've seen a few times people charging what they think others want to pay or are willing to pay. They are usually way way too low. You give speed and quality where others do not (and reliability) and people usually pay a lot more. Obvious depends on who/what market your in though.

Just know your customer. Talk to them. Take them to lunch. Make it so that if you really are too high they will talk to you before going elsewhere. But be better than your competitors so even if they do leave they'll come back. You'd be surprised how stupidly companies are run with lack of customer service, bad service, bad quality work, not showing up on time, etc..

Good info. Thanks.