How are service-based industry margins unique?
Net profit margin only measures how much money is earned per dollar of sales. However, this doesn’t reflect how much money your business could make. Several factors decide what adds to—or takes away from—a service-based business’s net profit margin.
The factors contributing to net profit margin for service-based businesses can be difficult to pin down. Whether the service is repairing computers or packing and moving for homeowners, you need to account for new variables for these types of business.
1. Direct Costs
Direct costs can be fully attributed to producing a service. For service-based industries, these costs include everything from supervisor salary to sales commission for a specific project.
For example, if ABC Company is designing a computer program for a customer for internal use, the costs would be assigned to the customer as a direct cost.
2. Indirect Costs
Indirect costs are the operational costs of doing business. Indirect costs factor in aspects such as rent and utilities overhead, administrative costs, cleaning supplies, computers, cell phones, technology, and office furniture. Several indirect costs can be associated with employees, such as health insurance, other benefits, and employee training.
3. Time Costs
As the adage goes, “Time is money.” Collecting and monitoring data to figure out how much time is necessary for a service makes projecting costs easier. Time tracking programs enable you to monitor the productivity of employees and determine how long you need to deliver certain services.
4. Employee Salaries
A marketing director who has been with your firm for the last seven years will not be on the same end of the salary spectrum as a young graphic designer. To account for the indirect costs of their salaries, it helps to calculate an average hourly rate. Your business accountant can assist you with this calculation.
While marketing is vital to your business’s success, it does eat into your net profit margin. Whether your social media manager handles your marketing strategies or you’re running SEO campaigns, these activities require different levels of advertising costs, impacting your net profit margin.