Guidance and Knowledge for Value Investors
Margin is a term commonly used in calculating the percentage of profit on sales. Margin sometimes gets misused in calculating markup on costs.
Markup has a very simple definition, it is the amount added onto costs to create a sales price. Notice something really important with that definition, it does not define profit. It merely defines how much to charge over costs so you can make a profit.
There are basically three groups of financial based project reports. Each set has its own priorities and purposes. Project reports are a function of production reporting with the exception of the balance sheet set (commonly used for cash flow purposes).
I’ve been asked to identify the average margins in the construction industry. Honestly, there is no such thing. I tried and after several hours of research I couldn’t even get one of the types of contractors to have consistency in their numbers.
A very common small business in the service industry is the carpet cleaner. Many owners of such businesses desire to know the margins and of course the associated operating expenses involved.
In business there are four distinct business models. Just about any business can be identified with one of the four. The following are the four types of business models: 1) Low-Volume, Hi-Margin, 2) Hi-Volume, Hi-Margin, 3) Low-Volume, Low-Margin and 4) Hi-Volume, Low-Margin.
Contribution margin is a core business concept and is often used in cost accounting to identify the amount of financial contribution a sold product provides to the company. Simply put, contribution margin is the sales price less the direct costs (sometimes referred to as variable costs).
The sole proprietorship is taxed at the individual tax level. Basically, the income earned during the calendar year is calculated on Schedule C of Form 1040. The final number is transferred to the front page of Form 1040 to line 12. Schedule C is divided into three major sections.
Simply put, ‘cost of goods sold’ equals the direct costs of materials, human resources, and equipment needed to produce the item sold. However, this can be confusing because there are many marginal cost items that affect the real cost of producing and selling the item.
It is amazing how one simple formula can be so confusing to the average business owner. The formula is markup. It is defined as the dollar amount or percentage of the cost of the item added to the item to equal its sales price. Many entrepreneurs especially those in retail confuse this simple formula with margin.