How to Figure Out the Gross Profit From Wages & Labor
Gross profit is revenues minus direct costs of goods sold. Direct costs include raw materials and labor costs incurred in the actual production of goods or provision of services. Companies that provide services do not incur raw materials costs, which means their gross profits are revenues minus labor costs. Indirect costs are incurred for administrative and support staff that are not directly involved in providing services. Other indirect costs include marketing expenses, travel, maintenance, interest and taxes. Net income is gross profit minus indirect costs.
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Instructions
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Get the number of employees directly involved in providing services. For example, bank lending officers working on customer mortgage applications or consultants working on a client project represent direct labor because they are directly involved in generating revenues.
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Find the hourly billing rates and internal costs for each employee involved in providing services. Companies may internally track their costs by project or by client. Note that the billing rates refer to the amounts billed to your customers, while internal costs are the hourly or daily labor costs derived from annual wages, benefits, bonuses and other direct compensation costs. These rates and costs vary by employee classification, employer and the type of work performed.
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Add the number of hours worked by each employee on each project. Tracking revenues and costs separately should allow you to assess the profitability of different service offerings. You could then assign your most experienced managers or consultants to oversee the most profitable projects. This keeps your key clients satisfied, which is important for securing repeat business.
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Compute the revenues over a period, which could be a month to a year. Businesses usually keep a running tally of their client billings. For example, if your consulting firm has billed three clients $5,000, $7,000 and $10,000 this month, the total revenue is $22,000 ($5,000 + $7,000 + $10,000).
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Calculate the direct labor costs over the same period. Multiply the internal labor costs by the number of hours or days spent by each employee on each project. Continuing with the example, if your firm employs two full-time consultants and an administrative support person, only the consultants will incur direct costs. If the daily costs for the two consultants are $200 and $300, and they have worked 20 days each during the month, then the direct labor costs are $10,000 [20 x ($200 + $300) = 20 x $500 = $10,000].
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Determine the gross profit, which is equal to revenues minus direct labor costs. To conclude the example, the gross profit is $12,000 ($22,000 - $10,000).
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Tips & Warnings
According to "Forbes" reporter Mary Crane, information technology consultants typically charge by the hour, while management consultants might charge a flat fee per project. Strategy consultants usually charge the highest hourly rates, followed by operations, human resource and technology consultants.
