One of the great privileges we have at Hacker Accounting is working with so many independent contractors and entrepreneurs. There is something very satisfying about seeing a small business or contractor overcome the initial struggles and build a strong business that will last for many years.
In many ways, we feel like we have had a front row seat as we watch contractors fight for their wins and suffer through their losses. Observing this up close has given us an opportunity to track the more common mistakes and then pass advice along to help others avoid those mistakes.
One mistake we see contractors make is giving on site estimates. This can be a tricky situation that has to be handled correctly or it will result in the loss of profit. We’re not suggesting that it is impossible to give good, solid onsite estimates that will bring in the right amount of money. What we do suggest is that until you get your system down, you may want to return to your office to calculate the estimate before submitting it.
For one thing, it can be difficult to correctly add up overhead, profit and mark-ups while you are on site. In a situation where you are trying to quickly please a potential client, you may accidentally fumble over numbers and end up quoting a price that is too low. This can definitely hurt your business.
Let’s Look At Some Numbers
Let’s say you have a job that is estimated to cost $1000 to complete. To bring in the right amount of money, you will need to come up with a sales price that includes overhead and profit. If your overhead comes out to 25%, you will need to be sure to account for the 10% profit. Many people would make the mistake of simply doing the following calculations:
$1000 + 25% overhead ($1000 x .25 = $250) = $1250
$1250 + 10 % profit ($1250 x .10 = $125) = $1375
This seems straight forward enough. However, if you are not marking up your overall cost to adjust for a sales price, you may be missing out on money that should come your way. With 25% going to overhead and 10% going for profit, that means your average job costs are at 65%. This changes how you would calculate your sales price.
If you were to use a markup of 1.72 times the cost of the job, you will come up with a more accurate sales price:
$1000 x 1.72 = $1,720
As you can see, this drastically changes the estimate by close to $400.
This is just one way why onsite estimates can be tricky and can lead to a loss of profit if you’re not careful. For more tips and idea on how to help your business be successful, give Hacker Accounting a call at 602-375-5251.