How to Calculate Your Profit Margin

Why would you do a job if you're not going to make enough to cover your operating costs? It's surprisingly easy to forget the hidden costs that affect your bottom line. Determining how much you charge for a job needs to factor in the basics, such as materials and your time, as well as operating expenses such as insurance, staff training and travel. 

Keep your business on the right financial track with our Free Profit Margin Calculator

Low on time? Skip ahead! 

1. What is a profit margin? 
2. Calculating your profit margin
3. Gross profit margin vs. Operating profit margin vs. Net profit margin 
4. Profit margin formulas
5. How to increase your profit margin 

1. What is a profit margin?

A reliable profit margin calculator is crucial to make informed financial decisions for your business. In general, your profit margin is the percentage of income remaining after costs are deducted from sales revenue. The higher this percentage, the more profit your business earns. A lower margin, however, leaves you vulnerable to unexpected issues, such as sudden hikes in raw material or shipping costs, which could threaten your business. Your profit margin is the percentage of income remaining after costs are deducted from your sales revenue. Generally speaking, a good profit margin is 10%, but this can vary across industries.

2. Calculating your profit margin

Enter labour costs

• Input the total value of all staff and contractor wages for this job.
• Result: Labour Cost ($/€/£): ___

Enter materials cost

• Input the total value of all materials used on the job.
• Result: Materials Cost ($/€/£): ___

• Input the total value of overhead expenses and indirect costs for the job (e.g., petrol, equipment rental, electricity).
  
• Result: Overhead Expenses ($/€/£): ___

Enter invoice amount

• Input the amount you will charge for the job (excluding tax).
• Result: Invoice Amount ($/€/£): ___

Calculate the total profit on the job

• Total Profit= Invoice Amount − (Labour Cost + Materials Cost + Overhead Expenses)
• For example: 
  • Labour Cost: $500
  • Materials Cost: $300
  • Overhead Expenses: $200
  • Invoice Amount: $1500

• Total Profit=$1500−($500+$300+$200)=$500
• Result: Total Profit on Job ($/€/£): 500

Calculate profit margin on the job

• Profit Margin (%) = (Invoice Amount / Total Profit​)×100
• For example:
  
  • Labour Cost: $500
  • Materials Cost: $300
  • Overhead Expenses: $200
  • Invoice Amount: $1500
  • Total Profit: $500 

• Profit Margin(%)=($500/$1500) x 100 = 33.33% 
• Result: Profit margin: 33.33%

3. Gross profit margin vs. Operating profit margin vs. Net profit margins

A company’s profit is calculated at three levels on its income statement, each with corresponding profit margins calculated by dividing the profit figure by revenue and multiplying by 100.

• The most basic is gross profit margins. This represents the portion of sales revenue that exceeds the direct costs of performing your services.
• Operating profit margins cover both the direct costs of production (COGS) and the operating expenses. It shows your profit before interest and taxes.
• Your net profit margin shows the most comprehensive view of your finances. This is because it takes into account any taxes, additional payments and insurance costs your business needs to cover. 

4. Profit margin formulas 

Gross profit margin formula

• Gross Profit Margin = ((Revenue-Cost of Goods Sold)/Revenue)×100

Operating profit margin formula

• Operating Profit Margin  = (Revenue/Operating Profit​)×100

Operating Profit is calculated as Revenue minus Operating Expenses (which include costs such as rent, utilities, and wages, but excluding interest and taxes)

Net profit margin formula:

• Net Profit Margin=(Revenue/Net Profit​)×100

Net Profit is calculated as Revenue minus all expenses, including COGS, operating expenses, interest, and taxes.

5. How to increase your profit margin

There’s no one-size-fits-all approach to increasing your profit margins. Each business will need to factor in the number of employees on hand, funding, resources, customers and the million other factors that go into running a successful trade business. However, there are some avenues to explore if you’re ready to grow your trade business. 

Reduce operating costs 

Although cheaper often doesn't equate to better, it's worth periodically checking for deals, discounts and better offers among your suppliers. Loyalty to contractors and suppliers often comes with benefits of their own, however, if you find your operating costs out reaching your means, consider finding alternatives. 

Find a more sustainable way

Finding ways to reduce material waste and energy use not only helps the planet — but also your bottom line. 

Increase your value

Being a good tradesman involves pushing yourself to keep on top of your trade, as well as all the business, customer service and financial management that's par the course of running your own business. It's a lot! But, ensuring you're organised, informed about industry trends, and continuously improving your skills will help you thrive in your business.

Adjust your pricing

When did you last review your pricing scheme? If the answer is over a year, it's time to evaluate how much you're charging for each service. Check how your prices compare to your competition, changes in inflation and the cost of living, demand and your value! 

Is it time to charge more? Check how your charge-out rate stacks up 

Streamline operations and processes

To automate repetitive tasks, use Tradify to automate tasks like scheduling, invoicing, and inventory management!

Ready to get organised?

Tradify is a job management app used by thousands of tradespeople building better lives and businesses all over the world. It gives you all the features needed to manage and grow a successful trade business, including:

• Enquiries
• Quoting
• Invoicing
• Scheduling
• Job tracking
• Subcontractor management

Start your 14-day free trial today. No credit card required. No pressure. Or take a look at Tradify in action during one of our weekly 30-min live walkthroughs.