How much is left for the business after expenses are met? All entrepreneurs should know how to calculating the commercial margin. This calculation allows them to know the revenue they earn after paying the cost of sales, providing an important benchmark for to find out the company's profitability.
To understand how to calculate the mark-up, it is sufficient to be clear about two concepts:
The mark-up measures the amount of money earned from sales that is retained after expenses have been paid. The larger the margin, the higher the percentage of profit that will be made on each sale.
Cost of sales is one of the variables that needs to be entered into the formula for calculating the commercial margin.. Cost of goods sold includes the direct cost of producing the good or the wholesale price of resold products and the direct labour costs involved in manufacturing the product. Specifically, this variable could be said to include:
The best way to understand how to calculate the mark-up is with an example. We can imagine a company that manufactures electric scooters and sells them at a price of two hundred euros per unit. The production of each one costs the company three quarters of that amount, i.e. one hundred and fifty euros, a figure that already allows us to know the gross profit.
To calculate gross profit, the difference between revenue and cost of sales must be found:
200 - 150 = 50 gross profit
To calculate the mark-up, gross profit must be divided by revenue., as follows:
50 / 200 = margin of 0.25
To make the margin a percentage, it would be sufficient to multiply the result by 100:
0.25 x 100 = 25% of margin
The commercial margin in this case would be 25%. This means that the electric scooter company keeps 25% of its total revenue and invests the remaining 75% in the manufacture, distribution and sale of the scooters.
This is an important measure for business owners, as it highlights weaknesses in the operating model and allows comparison of performance from year to year.. This metric is also relevant for investors, as it has important implications for the future growth of a business and therefore for investment potential.
Returning to the example, it could be said that, for every euro collected, 25 cents is earned, so to boost the profitability of the company, one should try to increase that amount, or reduce the cost.
One way to achieve this would be to try to reduce tax expenditures, which is possible when using solutions such as, for example, Petrol Ticket, which offers discounts on refuelling from the first litre and facilitates the deduction of VAT on fuel by combining all costs on a single invoice.
