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  1. #1
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    Advice on Gross Margins

    I know there are a lot of "what should I charge" questions, I probably wrote one of them But my little business is growing to where I now have 2 designers and a front-end dev, so I am pretty much just working project management/sales and growing the company. I hired a business consultant who helped me construct a sweet excel sheet that I can plug in my mgmt time, contractor fee's, expenses, and gross margin to calculate cost of project.

    So my question is, what kind of gross margins are other shops using to stay healthy? I do not have an office, we all work remotely, but I still need to pay bills and have money to grow and market. So whats common? 25%, 50%, 100%?

  2. #2
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    With all due respect to your consultant, you are looking at this the wrong way round. Rather than starting out with a percentage gross margin figure, you first need to determine your overhead costs. That will tell you the total gross profit you need to achieve. From there, you will be able to determine the percentage gross margin for any given turnover level.

    For example, if your overheads are 100, and you currently have projects where the direct costs (contractors' fees, etc) are 500, then you need to charge 600 to cover the direct costs and your overheads. Sales of 600 on a cost of 500 is a mark-up of 20%, which is equivalent to a gross margin of 16.67%.

    Your overheads are probably higher than you think. The most important is your own time (excluding time that is directly chargeable to projects). If you fail to take that into account, it will be like working without a salary. Then there are your premises. You say you work from home. But there are still costs associated with that: heating, lighting, wear and tear on furniture and equipment, and so on. You also need to allow for marketing, consultancy fees, general administration, and perhaps interest on any loans you have taken out.

    So, work out your overheads first. then work out your direct costs. And that will tell you the required gross margin.

    Mike

  3. #3
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    Thanks for the response! I have been taking most of that into consideration, but I have a few things left to add in...but I need to tap into better paying clients first..lol.

  4. #4
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    Quote Originally Posted by satori83 View Post
    ...but I need to tap into better paying clients first..lol.
    Ay, yes. That's always the first priority.

    Do come back if you have any follow-up questions.

    Mike


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