Calculating profit

Discussion in 'Accounts & Finance' started by peterb20, Sep 9, 2019.

  1. peterb20

    peterb20 UKBF Newcomer Free Member

    7 0
    I have a logic issue with calculating profit. I have a god damn degree in maths and can't see why one of the following is right and one is wrong! (by the way, I know which is the right one to use, I just don't know why!)

    Say I do a job that will cost me £1000. My logic says that to make 20% profit on that job I should charge £1200.

    However I also know that profit margins are calculated 'backwards'. Ie the profit margin given a £1200 bill to the customer of which £200 is profit is 200/1200 = 16.6%.

    I use the 2nd of these to analyse my business, but I can't see why the 1st isnt acceptable. Are they just arbitrary, so if either is used consistently then it doesn't matter, or should 1 be used over the other (pretty sure I know the answer!). If so, why!

    Please help a confused soul!
     
    Posted: Sep 9, 2019 By: peterb20 Member since: Nov 5, 2012
    #1
  2. Mr D

    Mr D UKBF Legend Free Member

    16,808 1,881
    Use whatever method you wish for yourself.

    When other people are discussing profit that's when I usually hear percentages bandied about. For talking to my wife or accountant generally use cash figure. Such as 'made £1.10 profit on that sale'.
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
    #2
  3. alan1302

    alan1302 UKBF Enthusiast Free Member

    552 99
    Why do you think one could be wrong?
     
    Posted: Sep 10, 2019 By: alan1302 Member since: Jun 2, 2018
    #3
  4. NicoJ

    NicoJ UKBF Regular Free Member

    128 16
    Both are correct, the first is mark-up, generally easier to calculate (as you are calculating on a known price).
    The second is margin, which is the amount you earned on the total amount. Generally used by accountants at the end of the year.
     
    Posted: Sep 10, 2019 By: NicoJ Member since: Mar 27, 2017
    #4
  5. peterb20

    peterb20 UKBF Newcomer Free Member

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    Because there can surely only be one universally recognised way of calculating profit given 3 figures (cost, profit, revenue)
     
    Posted: Sep 10, 2019 By: peterb20 Member since: Nov 5, 2012
    #5
  6. NicoJ

    NicoJ UKBF Regular Free Member

    128 16
    There is only one way to calculate profit as a number. The options you are talking about are simple mathematical analysis on this figure.
    Mark-up is based on a without profit figure.
    Margin is based on a with profit figure.
    Percentages based on different figures will give different answers, but both are correct.
     
    Posted: Sep 10, 2019 By: NicoJ Member since: Mar 27, 2017
    #6
  7. Mr D

    Mr D UKBF Legend Free Member

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    Yet if you can find two ways then there is not just one.
    Both methods are pretty common - whether universal I do not know. People do not universally accept even common stuff.
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
    #7
  8. chalkie99

    chalkie99 UKBF Enthusiast Free Member

    845 255
    This just shows how worthless degrees are.

    I recently read an article in a newspaper for a large city which contained English I would not have got away with at primary school, yet on checking the "journalists" Linkedin profile I saw he had no less than a Masters Degree in journalism!

    Young people have been duped into studying for worthless degrees for which they incur large debts that they will struggle to pay off.

    It keeps them off the unemployment register for a few years making the government of the day look more successful while the universities hand out degrees like confetti to make themselves appear clever.

    The gullible students get a piece of paper which won't get them a job and a debt which will stop them ever owning their own home and being slaves to the rental market, lining someone elses pockets.

    It seems you have a degree but still don't know the basic difference between profit and mark up margins.

    No wonder there are regular posts here from people who cannot understand that VAT is added to the nett price and taking 20% off the inclusive price produces a different result.
     
    Posted: Sep 10, 2019 By: chalkie99 Member since: Nov 14, 2008
    #8
  9. Mr D

    Mr D UKBF Legend Free Member

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    Its usually a load of free money from the government for 3 to 5 years with a graduate tax that has a very high tax free figure. What is not to like?

    Past 15 years or so there have been loads of jobs that cannot be applied for without a degree. Does not matter what in, but without a degree the jobs were a lot less.
    About 10 years ago I was looking for a replacement job. Within 30 miles there were hundreds of jobs in my field, there was just one that did not require a degree.

    Lots of people don't understand VAT because they never studied it at school or uni. Ignorance of something that was never taught is easily corrected but can hardly expect people to be born with the information programmed in. Lots of business issues are not taught in school or in most degrees.
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
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  10. SteLacca

    SteLacca UKBF Ace Free Member

    1,479 289
    You are comparing apples and pears. Markup is calculated a percentage of the net, profit is calculated as a percentage of the gross.
     
    Posted: Sep 10, 2019 By: SteLacca Member since: Jun 16, 2016
    #10
  11. Newchodge

    Newchodge UKBF Big Shot Free Member

    12,622 3,287
    There is only one way to calculate the number: Revenue - cost = profit. All of those are numbers. You want to find a percentage, which you can do in different ways depending on what question you are asking.
     
    Posted: Sep 10, 2019 By: Newchodge Member since: Nov 8, 2012
    #11
  12. peterb20

    peterb20 UKBF Newcomer Free Member

    7 0

    Wind your neck in pal, the maths was all good, and it turns out everyone agrees that both methods are correct, it's the terminology that was wrong. I'm running a small business, I'm not an accountant so why would I know the difference between markup and margin due to a degree in maths?
     
    Posted: Sep 10, 2019 By: peterb20 Member since: Nov 5, 2012
    #12
  13. alan1302

    alan1302 UKBF Enthusiast Free Member

    552 99
    That's a very weak argument - had you thought it was written quickly, not checked properly and just put on the website? One article does not mean the writer does not know how to use written English.

    Also if someone is a journalist does that have to mean they are good at English? Surely journalism is about investigating and reporting of news not being able top spell.
     
    Posted: Sep 10, 2019 By: alan1302 Member since: Jun 2, 2018
    #13
  14. Mr D

    Mr D UKBF Legend Free Member

    16,808 1,881
    These days people use spellcheckers.

    Getting a Masters means someone has met certain requirements for academic work. The journalism you usually see is not academic.
    Is there an English module in the MA in Journalism offered at any of the places doing the qualification? Or do they rely for an English qualification only what has been learnt in school when a teenager and younger?
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
    #14
  15. alan1302

    alan1302 UKBF Enthusiast Free Member

    552 99
    And spellcheckers are where mistakes can come from - especially ones that make automatic changes.
     
    Posted: Sep 10, 2019 By: alan1302 Member since: Jun 2, 2018
    #15
  16. The Byre

    The Byre UKBF Ace Free Member

    8,984 3,509
    This statement
    is totally incompatible with this statement
    The answer to the question "why would I know the difference between markup and margin?" is because you are running a small business. It is your job to know the difference. It is in fact at the very core of running a business!
     
    Posted: Sep 10, 2019 By: The Byre Member since: Aug 13, 2013
    #16
  17. peterb20

    peterb20 UKBF Newcomer Free Member

    7 0
    I totally disagree. As long as im doing the right method (I am), whether I know the correct terminology is a moot point.

    Also, do I really need to know the difference? The important figure is the margin (I now know the correct wording for it!). If my margin is correct then by association my markup must be correct also.

    As long as my margins are correct, I'm happy. But thanks for being so wonderfully condescending in your answer to a fairly valid question, from a guy who hasn't long been in business.
     
    Posted: Sep 10, 2019 By: peterb20 Member since: Nov 5, 2012
    #17
  18. Mr D

    Mr D UKBF Legend Free Member

    16,808 1,881
    Oh yes.
    Sometimes with hilarious results.

    Heard a while back about a gay guy called Gary who had a memo from his boss.
    Dear Gay …. of course both Gary and Gay can be in a spellchecker and someone relying just on it ….
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
    #18
  19. MBE2017

    MBE2017 UKBF Ace Free Member

    1,072 279
    Ok, without being condescending, it also depends on your industry etc. A single job might cost you £1000, but your overheads are probably annual, such as rent etc.

    Therefore to truly work out your profit depends on covering all your overheads, for the whole year. Once that is done, you will be making a profit, not just a mark up.
    .
     
    Posted: Sep 10, 2019 By: MBE2017 Member since: Feb 16, 2017
    #19
  20. Mr D

    Mr D UKBF Legend Free Member

    16,808 1,881
    Some people work out a break even point in sales. Anything above that is profit.
     
    Posted: Sep 10, 2019 By: Mr D Member since: Feb 12, 2017
    #20