Determining the Profit Margins For Services-based Companies

Determining the Profit Margins For Services-based Companies

It is critical to be well-verse with profit margins to effectively manage the finance of a company. This can be accomplished by seeking help from a trusted accounting firm in Johor Bahru. For an organisation that markets products, determining profit margin is based on the relationship between the gross profit earned and the sales.

However, when it comes to a service-oriented business, establishing profit margins is not so simple. The concentration should be placed more on the qualitative base as well as the intangible aspects to understand whether the company is making profitable deals. To figure out profit margins, below are a couple of points that you want to look at.

The Time and Resources Allocated to Provide the Service

A bookkeeper in Johor Bahru will probably suggest you purchase a time tracking system. Most service-based companies are usually people-oriented in terms of the cost structure. This is so you can have an overview of how much time is spent on completing each task and efficiency of your workers were during that time. With time cost information, the management will be able to measure the price of the service and how much profit the company is earning (Also see The Accounting Obstacles Encountered by Start-ups).

Experience of Your Staff

Some of the employees are junior and others are senior and depending on who oversees a specific assignment, the quality of service could vary (Also see Better For Your Company to Hire a Professional Accountant?). An experienced engineer that has been with the company for at least a decade will naturally be paid more than a junior engineer just onboard. Taking the hourly rates into consideration is a wise move as the contribution of each staff in the assignment varies, it will certainly help make things more accurate.

Take Into Account Direct Costs and Indirect Costs

What the company pays its staff does not necessarily mean a deduction from the profit margin. Instead, the direct and indirect expenses should be first determined. Your profit margin is determined after you consider direct expenses such as direct time cost to provide the service and travelling cost incurred to serve a client. Indirect costs such as worker training, employee benefits, on the other hand, must not be factored in. Examine your cost category so you can know which of your expenses affect the profit margins. A skilled accounting firm in Johor Bahru can assist with all the computations (Also see Reason a Bookkeeper Is Crucial For The Success of a Business).

Administrative and Advertising Expenses

In the business environment today, the competition is so rigid that every company needs to put in a lot of advertising and marketing efforts to prosper. These efforts cost money which will have to be considered when calculating the profit margins of your business. Management expenses are not to be disregarded, such as client payment, obtaining task requirements, invoicing, and so on. You want to take into consideration every element that affects the general price of the solution rendered by your company when determining your profit margins.

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