How Much Profit Should I Make as a Tradesperson?

No single figure fits every trade business. But there is one that fits yours, and you can work it out in ten minutes.

Profit is not your wages

This is where most of the confusion starts.

Your wages are what the business pays you for the days you work. That is a cost, like materials or fuel.

Profit is what is left after the business has paid for everything, including you.

If the year ends with you paid and nothing left over, you made no profit. You were paid for your work. The business gained nothing.

What profit is for

Price your work properly and every job pays for itself: the materials, your days on it, and a share of running the business.

So what is profit for?

It pays for everything the jobs do not.

• Weeks with no work. The van, the insurance and the phone cost the same in a slow month as a busy one.
• Jobs that go wrong. A customer who never pays. A job that takes four days when you priced three.
• What comes next. An apprentice, a week off, work you could not take on before.

No customer pays for any of that. Profit does.

Three questions that give you the number

Write down a figure for each. A rough figure you have thought about beats no figure at all.

1. What would you need to get through a month with no work?

Not a month off. A month where the phone barely rings and almost nothing comes in, while the bills carry on.

2. What will go wrong this year, and what will it cost?

One customer who never pays. Two or three jobs that run over the days you allowed. You cannot know which. You know something will.

3. What do you want this year to leave you with?

A week off. An apprentice. Money in the account that was not there in January.

Add the three together. That is the profit your business needs this year.

Nobody else can set that number for you.

How to check whether you got it

Two sums, once the year is done.

Profit is all the money customers paid you, minus everything the business spent, your own wages included.

Margin is that profit divided by the money customers paid you. It tells you what you keep out of every pound.

Compare the profit with the number you wrote down in January.

Why your accounts show a bigger number

A sole trader does not get a wage. There is no payslip. Money you take out of the business is called drawings.

HMRC does not treat drawings as a business cost, so your accounts never show your wages as a cost. The profit figure your accountant gives you has your wages inside it.

It is a bigger number, and it is the one your tax is worked out from. It does not tell you whether the year worked.

A worked example

One tradesperson, one year. Every figure here is made up. Put your own in.

Part 1: the target, set in January

Part 2: the year, added up in December

Money customers paid: £100,000. What the business spent:

The £250 a day is worked out too. He needs to earn £50,000 in the year, and 200 days of that year are days he can put on an invoice. £50,000 ÷ 200 = £250 a day. The rest of his working days go on quoting, chasing money, and jobs that fall through.

How to build a price out of that day rate, your materials and your overheads: How to Price Jobs Without Losing Money.

Profit: £100,000 − £85,000 = £15,000. The target was £15,000. This year hit it.

Margin: £15,000 ÷ £100,000 = 15%. Fifteen pence kept out of every pound that came in.

Part 3: what the accountant calls the same year

They do not count the £50,000 of wages, because drawings are not a business cost. So they take off the other three lines only:

£25,000 + £3,200 + £6,800 = £35,000

£100,000 − £35,000 = £65,000

That £65,000 is the figure your tax is worked out from. It is the £50,000 of wages and the £15,000 of profit added together.

Same year. Two numbers. Both are correct. Only the £15,000 tells you whether the business paid.

Three signs the number is too low

Money comes in and the account never grows. Every pound that arrives is already going back out.

You cannot replace anything. The drill is nearly finished and there is nothing spare to buy another.

A slow fortnight frightens you. If two quiet weeks put the mortgage in doubt, nothing has been set aside.

Four ways to move it

None of them is taking on more work.

Price properly. The biggest change you can make, and the one people try last. Build the price out of materials, your days, a share of running the business, and the profit you decided you need. The four parts of a price, in order: How to Price Jobs Without Losing Money.

Add up what you spend. Not to cut all of it. Some of it is the cost of doing the work. But you cannot decide about a cost you have never counted.

Do more of the work that pays. Some jobs return more for the days they take. Most tradespeople have a feeling about which ones. Few have checked.

Lose fewer evenings to paperwork. An hour spent hunting a receipt is an hour nobody pays for.

How Nule helps

Nule keeps your quotes, jobs, costs and invoices in one place, so the figures are there when you go looking.

Price the work with materials, outside costs and a buffer. When the customer accepts, the quote becomes a live job on its own, so the estimate is still there to measure against. Log hours, materials and receipts as you go.

End Job Insights show how one job turned out against the price you set. Business Insights show what keeps happening:

• which jobs lose you money
• where the same kind of work gets priced too low, again and again
• materials against your estimates
• hours against the time you allowed
• where your expenses actually go

Write the number down

There is no right profit figure for a tradesperson. There is only the one your business needs, and it takes ten minutes to work out.

Most people never do it. They find out in December whether the year paid.

Ten minutes in January tells you what you are aiming at.