How much markup do you need to cover overhead?
This question comes up frequently. The fact of the matter is it’s a moving target, because it’s based on a few variables that constantly impact each other, kind of like a circular reference in excel.
What I mean is this – you can budget for your operating expenses for the year, and you have a solid handle on your cost of goods sold, and if you’re in a competitive industry then you probably don’t have a lot of control over your gross margins.
So it becomes more a question of how much revenue can you generate per employee before you have to hire another employee (and take on additional overhead) to handle the work?
The circular reference comes into play when you start missing revenue targets or your gross margins are lower than projected. Now you have to cut your OpEx because your overhead is making you cash flow negative.
It’s not as simple as just applying a markup percentage to cover your overhead, because chances are you will price yourself out of the market. You need to figure out what the market will pay for your product or services, and then build an OpEx budget that doesn’t sink the ship.
If your OpEx puts you in the red, then it’s time to revisit the model, see where you can improve the operation, or figure out ways to generate more revenue without taking on additional operating costs.