Calculating Margin/Mark up with/without VAT

commervan · 03-10-2007, 01:38 PM

Hello everyone

I'm trying to figure out my margins and mark up... one thing I'm having difficulty with is whether to take into account the VAT for these calculations.

If I pay £58.75 to a VAT registered supplier, then sell that product for £117.50 (incl VAT), then my margin is 50% and my profit will be £50, but then I'll also have recovered VAT of £8.75, so ending up with equivalent of £58.75

If I pay £50 to a non VAT supplier, selling for £117.50, then I'm making a straight £50, with no VAT recovery... but is this still regarded as a 100% mark up / 50% margin?

or do you just ignore the vat altogether and work with the net figures...?

**Pete** · 03-10-2007, 02:01 PM

You work with what works best for you. And don't forget shipping and related costs.

The real figure to use is what is referred to as "Landed Cost". This would not include VAT, since that will just wash itself out.

Landed Cost is what it costs to put an item on your shelf. For a serious importer this could include everything past the FOB point, usually the ship's rail or airport. It could include shipping, brokerage, customs fees, bonded warehouse fees, drayage, equipment rental and any other costs included in actually bringing the product to the buyer's warehouse.

All of these costs would be added to the invoice cost for the goods themselves and then factored down to an individual cost per item. Better inventory management and accounting programs will do this for you. QuickBooks will not. What they do is hold the invoice open, even after you "receive" the goods into your computer inventory, until you have the bills for the associated services and then they will average out the cost per item when finalizing the process.

More detailed than you expected, but forget VAT in your markup / margin / gross profit projections, but do include shipping and related costs to get a more accurate picture of what you are really making. Inbound shipping is a Cost of Goods Sold, not an expense.

commervan · 03-10-2007, 02:06 PM

thanks for quick reply!

part of the reason for my confusion is that I came across this tool http://www.retailacademy.org/default...content&id=473
for working out margins and wasusing it as a comparison to how I'd been working these out.

One thing I couldn't work out was if I put in 1 item as having a basic unit cost with no VAT (as is the case for a non VAT reg'd supplier), eg £50, a 50% margin comes out as £100 incl VAT - which is wrong as far as I can see. Surely this would be a margin of 41% (ie £35.11/£85.11)?

greedyboy · 03-10-2007, 03:54 PM

Are you VAT registered as that makes a MASSIVE difference to the scenario you posted.

If you are, you igonore the VAT amounts and work on the net amounts only.

If you are not VAT registered you include the VAT on the purchase price as part of your cost. You do not charge VAT. So in this case if you buy something for £100 + VAT your cost price is £117.50. IF you then go on to sell it for £199.99 your profit is 82.49 and your net margin is 70.2%.

Using the same figures, if you are VAT registered your purchase price is £100 and your selling price is £169.36 (59.04% net margin). These prices quoted are NET of VAT.

**Pete** · 03-10-2007, 04:12 PM

How true. I keep operating under the impression everyone sets up their business properly from the start. I guess I should have had a reminder that is not so from the recent thread on avoiding paying full VAT. I guess there are always folks willing to take shortcuts.

greedyboy · 03-10-2007, 04:41 PM

It has nothing to do with setting up your business properly.

In the UK it is not compulsory to be VAT registered unless your turnover is in excess of £64,000 in a given 12 months period. You may also register at any time prior if you feel it will be a benefit to your business, even from day one of trading.

There are benefits for registration and non registration in the UK which have been discussed many times on the forum.

veropierre · 04-10-2007, 02:16 PM

Man, I'm so happy we don't have VAT here

When I thing that several people in US wish to use VAT...

I'm sure these guys are accountant.

When I buy $100 net from a supplier in New York, I pay $100 as I have a retail certificate when I sell to another Minnesotan at $150 + Sales tax (6.65%) and send the $9.98 to the taxman. If I sell it online I sell it for $150 that's all.

Even if it's easy, I have an accoutant, he tells me how much to send so I can focus on fun stuff

commervan · 04-10-2007, 02:49 PM

Thanks for feedback.

So my understanding now is that I simply don't take VAT into account for working out markups and margins.

My "problem" was that by doing this, there'll be a difference for goods from Reg'd and non Reg'd suppliers, since a product costing £100 from a non reg'd supplier will essentially cost me more if I apply the same margin as I would to a reg'd supplier.

Do you agree?

greedyboy · 04-10-2007, 02:52 PM

I don't agree

I presume you are VAT registered?

If so, like i said you just ignore the VAT.

commervan · 04-10-2007, 03:10 PM

I will be VAT reg'd from the start.

If I can offset VAT paid on a product against the VAT I sell it for then isn't this better than a product bought with no VAT on it?

I understand that the whole idea of VAT is passing tax on and that the VAT money isn't mine - it's just that I by using net values, you seem to be better off buying goods with VAT.

Is it best just not to worry about this!?