Construction business owners use the terms Markup and Margin interchangeably because they describe the relationship among sales, cost and profit.
However, they have different meanings and are not calculated the same way.
Markup is based on job costs.
Margin is based on sales.
What’s the best way to remember the difference?
Here is an example:
If your sales for the week comes to $625 and the cost of your goods sold (COGS) is $500, then you have made a gross profit of $125.
Your Markup factor is equivalent to your sales divided by COGS for that job. In this instance, $600 divided by $500 = a Markup factor of 1.25. This means that your Markup percentage is 25%.
Your Margin is determined by dividing your gross profit by the COGS of the job. So $125 divided by $625 = 20%. Your Margin is 20%
Note that the two percentages will neve be the same. A 25% markup yields a 20% Margin, not a 25% Margin. The Margin percentage will always be lower than the Markup percentage.
The biggest mistake to avoid here is dividing your gross profit by our cost to determine the Markup you need to use in order to cover your 20% Margin for expenses and net profit. If you use the wrong variables to determine your necessary Markup, you’re going to find yourself losing money.
If you’ll recall my article from last week on Understanding Your P&L, we defined the four parts of the P&L as: Statement of Sales, COGS, Expenses, and Net Profit. The P&L statement is used in determining Markup and Margin.
If you need help determining the right markup for your job costs, please call Susan at 630.523.5762.