How to calculate the commercial margin

How to calculate the trading margin?

To understand how to calculate the trading margin, it's enough to have two concepts clear:

• Gross profit.
• Cost of sales.

The trading margin measures the amount of money earned from sales that is retained after paying expenses. The larger the margin, the higher the percentage of profit you will get for each sale.

What is the cost of sales?

The cost of sales is one of the variables that needs to be entered into the formula for calculating gross profit.. The 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:

• Cost of raw materials.
• Cost of goods purchased for resale.
• Cost of the parts used to build a product.
• Direct cost of labour required to manufacture the product, supplies used in production or sales processes, shipping costs, container costs, freight, and overheads directly related to manufacturing or production activity (such as facility hire and contracted services for manufacturing).
• Indirect costs, such as distribution costs and sales force costs.

Calculate the trading margin: practical example

The best way to understand how to calculate sales margin is with an example. We can imagine a company that manufactures electric scooters and sells them for two hundred euros each. The production of each one costs the company three-quarters of that amount, meaning 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, you would simply multiply the result by 100. Like this:

0.25 x 100 = 25% of margin

The trading margin in this case would be 25%%. This means that the electric scooter company keeps 25%%of its total revenue, and that it invests the remaining 75%% in the manufacturing, distribution, and sale of the scooters.

This is an important measure for business owners, as it highlights the weaknesses in the operational model and allows for year-on-year performance comparison.. This metric is also relevant for investors, as it has important implications for a business's future growth and, therefore, its investment potential.

Returning to the example, it could be said that for every euro charged, 25 cents are earned, so to boost the company's profitability, we would have to try to increase that amount, or reduce the cost.

One way to achieve this would be to try and reduce tax expenses, something which is possible when resorting to solutions such as, for example, Petrol Ticket, which offers fuel discounts from the very first litre and simplifies VAT deduction on fuel by consolidating all expenses onto a single invoice.