Home » Problems » Answer to Evaluating a Quarterly Review

A. Using the last quarter numbers, what markup should your company be using?

  • Projected sales volume for the year is $485,950.
  • Projected overhead expense for the year is $199,240 (41.0% x 485,950 = $199,240).
  • Projected net profit is $38,876 (8% x $485,950).
  • Job costs are $246,863. Total sales – overhead – profit = job costs ($485,950 – $199,240 – $38,876 = $247,834).
  • Markup is sales ÷ job cost = markup ($485,950 ÷ $247,834 = 1.9608 or 1.97).

Answer A: The markup for your company should be 1.97.

B. Looking at the Quarterly Overhead Review, what steps could you take to reduce your overhead and lower your markup?

Looking at the numbers for your company, the expenses are in line. However, you think that the markup for your company is too high and you’ll soon price yourself out of business if you don’t bring it down. There are several things that you can do to reduce your markup rather dramatically. Since you’re running a small one-man operation, you decide that you should make the following adjustments based on the information from the Quarterly Overhead Review.

First, as the owner, you’re doing your own sales and job supervision as well as collecting an owner’s salary to run the company. You’re are not doing any of these full time, so technically, we should reduce the amount you are paying yourself. For the last quarter, these three expense items added up to $27,395 and amounted to 20.5 percent of the company’s overhead. Granted that’s a nice wage, but it’s costing the company too much.

Remember, the first four years in business, your owner’s salary should be limited to 8% of your gross sales, but you are doing job supervision and sales as well. If you combine your salary on those three expenses to 5 percent, your total salary would be 15 percent of gross sales, which isn’t out of line. That will reduce your quarterly compensation to $20,045 ($133,636 * .15), a reduction of $7,350. And that still gives you a monthly salary of $6,682.

If you wanted to be more conservative you could reduce your total salary further, but let’s see how it works with a 15 percent compensation. Using the reduced quarterly overhead percentage of 35.7 percent (41.0% – 5.5% = 35.5%), how would that change your markup?

  • New projected overhead for the year would be $172,512 ($485,950 x 35.5% = $172,512).
  • Profit would still be $38,876 (8% x $485,950).
  • New job costs would be $273,590. Sales – overhead – profit = job cost ($485,950 – $172,512 – $38,876 = $274,562).
  • New markup would be 1.77. Sales ÷ job costs = markup ($485,950 ÷ $274,562 = 1.7699).

The next item that you want to look at is your office staff. In a small company like yours, the Office staff expense should be closer to the minimum 3 percent. The quarterly review shows that this expense is more than double that percentage.

Rather than have a full-time bookkeeper on staff, you need to either have your bookkeeping subcontracted out, or bring in a bookkeeper once or twice a week for a pre-determined number of hours. Eight hours a week should be more than sufficient time to complete all the necessary bookkeeping for a company of this size.

If you can reduce your office expense down to 3.00 percent, it’ll reduce your quarterly expense from $8,045 to $4,009 ($133,636 x 3% = $4009) and bring your overhead percentage down another 3.02 percent to 32.48% (35.5 – 3.02 = 32.48)

Let’s see what this will do for your markup.

  • New projected overhead for the year would be $157,837 ($485,950 x 32.48% = $157,837).
  • Profit would still be $38,876 (8% x $485,950).
  • New job costs would be $289,237. Volume – overhead – profit = job cost
    $485,950 – $157,837 – $38,876 = $289,237
  • New markup would be 1.69. Sales ÷ job costs = markup
    $485,950 ÷ $289,237 = 1.6801 or 1.69

There are a few other items that you could lop off the list as well. If you got busy and found some new phone service providers, you could further reduce both your office telephone and your cell phone expenses by .05%. You could easily eliminate your entertainment expense and your accounting fees are creeping up, let’s cut those to .25%. For the time being, let’s also reduce your O.C.R.A. contribution to 3% from the 4% you are putting away now. All totaled, these changes reduce overhead another 1.41% to 31.07%

Let’s see what that does to our markup.

  • New projected overhead for the year would be $150,061 ($485,950 x 31.07% (32.48% – 1.41% = 31.07%) = $150,985
  • Profit would still be $38,876 (8% x $485,950).
  • New job costs would be $296,089. Volume – overhead – profit = job cost
    ($485,950 – $150,985 – $38,876 = $296,089).
  • New markup would be 1.64. Sales ÷ job costs = markup
    ($485,950 ÷ $296,089 = 1.6412 or 1.65)

You might be able to make further reductions in your expenses by using your company vehicles more economically (i.e. reducing the mileage driven), and renting rather than buying tools and equipment when needed. As you can see, with a little more attention to the details, you can reduce your markup from 1.97 to at least 1.65 and possibly lower. These changes will put you in a far better position for sales.

With proper planning and expense evaluation you can reduce your markup, and at the same time maintain the income necessary to cover all of your job costs, all of your overhead expenses and still make 8 percent net profit. The important point to remember is that you must always do the math and be aware of what your actual expenses are and where they come from.

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