Revenue vs Profit: The Critical Difference
Many small business owners confuse revenue with profit and cash flow with profit — all three are different. A project can generate $10,000 in revenue and cost you $9,500 in time, materials, and overhead, leaving only $500 profit. If it took three weeks, your effective hourly rate was barely above minimum wage. Calculating true project profit before and after each job is essential to knowing which work to take and which to decline or reprice.
How to Calculate Project Profit
True project profit = Revenue − Direct costs − Indirect overhead allocation − Your time cost. Direct costs include materials, subcontractors, and any direct expenses. Indirect overhead is your share of fixed costs (rent, software, insurance) allocated to this project based on time spent. Your time cost is your hours × the hourly rate you need to earn. If the result is positive after all of this, the project is truly profitable.
The 40% Profit Margin Target
A healthy gross profit margin for service businesses is 40%–60%. Below 30% typically means pricing is too low or costs are too high. If your projects consistently show thin margins, the issue is usually either underpricing (not accounting for all costs), scope creep (doing extra work without charging for it), or inefficiency (projects taking longer than quoted).
Key Takeaways
- Don't rely on gut feeling — use numbers and a clear formula
- Review and adjust your figures at least once per year as costs and market rates change
- Use our free calculator above to apply these concepts to your specific situation
- Compare your results against industry benchmarks and adjust accordingly