Know your Numbers: Variable Costs and Fixed Costs in a Contracting Business



Transcript


Hey there! Ever ask yourself, "How much I should be charging on this job?" Well, today I'm going to talk about a principle that's fundamental in determining how much you should be charging on your jobs. Keep watching to learn more.


What's the #1 goal in your contracting business? To make a profit. How do you make a profit? You charge more than it costs to run a project? How do you know how much to charge? You understand your business costs. More precisely, how your business costs react to changes in the number of jobs performed within a range. Your costs react in two ways.


They are either variable costs, which are costs that change when we do more jobs. For example, materials and commission. If we were supposed to put this on a graph, what you would see is your total costs increasing with the more jobs that you do. The second way your costs react is through fixed costs.


These are costs that remain unchanged, even when we do more jobs. For example, rent and insurance. If I come back to here, and I say within a range, why I said that is because if your business grows, your fixed costs can increase. Just like insurance. If we had to plot variable costs and fixed costs on a graph, what we'll find is that our costs start at a point where our fixed costs are, and the variable costs start increasing your costs to reach your total costs.


So, here you have your fixed costs and here you have your variable costs and this line represents your total costs. If we had to plot sales into this graph, what we'll find is sales starts at zero and as we do more jobs, we eventually hit our break-even point and then anything past our break-even point is our profit.


So as you can see, our total sales are higher than our total costs, and that brings home a profit for us. This graph is so important to understand when calculating your markup or margin on your jobs, that you're going to be charging to your clients. If you understand this graph, you are 90% of the way in figuring out the markup unique to your business. And why I say it's unique


is because everyone has their own fixed costs and variable costs. Join me next week, where I start playing around with this graph to show you why the markup or margin in your business is unique when calculating how much to charge your clients. I hope you enjoyed today's lesson and I hope to catch you next week.


Cheers!