What Should Your Margin Be?

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  • The Cost of Goods Sold (COGS) margin that is designated in the estimating process is the key to a profitable project.

+ Sales (Revenue)
- Cost of Goods Sold (COGS)
= Gross Profit (GP)
- General & Administrative Expenses (G&A)
= Net Profit (Loss)

  • It is critical to use a COGS margin that will provide a Gross Profit (GP) that is adequate to cover the General and Administrative (G&A) overhead and the Profit margin dictated by the Business Model of the Company.

    This tool will calculate a Cost of Goods MARGIN that will result in a profit margin that you specify.

    It also calculates a mark-up and multiplier for you to use for individual services and products.

  • Enter the “Desired Profit” as a decimal (12% = .12).
  • At the CURRENT INCOME STATEMENT section, enter the “Sales”, “COGS”, and “Overhead (G&A)” information from the most recent Annual Income Statement.  The calculator will display the margins for each line item.
  • The PROFORMA FOR NEXT PERIOD section will provide the numbers that are required for the COGS calculations.
    • Select a “”Change Direction” (Same, Up or Down) from the drop-down menu.
    • Select a “Change %” from the dropdown menu.
    • Adjust the Overhead (G&A) expenses for the scenario. In the case of a DOWN scenario, a reduction in personnel may be necessary.  In the case of an UP scenario, you may add personnel, equipment or other expenditures.
    • A “Sales Scenario” is calculated for each case as you proceed.
    • The last column is used if revenues have already been projected for the next period. Enter the sales projection and the G&A effect in the cells provided.
  1. The reason you will want to run multiple scenarios using different Sales amounts is that as Sales increase, the amount of Gross Profit (GP) should also increase. 
  2. When the GP is used to cover a fixed amount of Overhead (G&A), the profit will also increase.
  3. IMPORTANT!!  If the Desired Profit % is being exceeded, the option exists to increase the COGS margin, thereby decreasing the overall costs of the estimate.
    • Increasing the COGS Margin decreases the amount of the Estimate!!
    • Decreasing the amount of the Estimate makes a proposal more competitive!!
    • Making a proposal more competitive should result in more sales!!
  4. Read number 3 again until the implications are clearly understood.
  5. At whichever COGS margin is used for an Estimate, always ensure that the G&A is being covered and the Desired Profit % is being met.
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