Help with profit calculation

[Lampre92]

Hi all, currently going through the process of becoming VAT registered so spending some time looking over some numbers and would like to see the difference in my net profit margin, can someone confirm I am doing it correct?


Product cost = £7.42
(£6.19 * 0.2 vat = £7.42)

Product sale price = £22.95
(£18.36 + 20% vat)

Cost of sale = £7.42
(12% of 22.95 as ebay fees + £3.44 postage + VAT = £7.42)

So that leaves us with:
£22.95 - 7.42 - 7.42 = £8.11

Profit margin = 8.11 / 22.95 * 100 = 35%

My confusion is with the VAT, looking at the above I have paid:
£1.23 VAT on product cost
£1.23 VAT on sale cost
Total VAT paid = £2.46
Total VAT collected from the sale = £4.59 (20% of sale price)
Total VAT I owe HMRC = £2.13

So is the true net profit margin:
£22.95 - 7.42 - 7.42 - 2.13 = £5.98 = 26%?

Sorry for all the numbers, I am sure an easier way exists but this is the only way I can seem to get my head around it, if anyone has an easier solution please let me know.

Also does anyone know what is considered a good margin in this case using the example of a £300k turnover per year, I have read a lot of information online but my margin seems extremely low to most I am reading online even when they are talking NET.

Thanks

 

[japancool]

Just ignore the VAT completely.

You paid £6.19 for the product.

You're selling it for £18.36. eBay charges you £2.54 for the sale. You paid £3.44 for the postage.

£18.36 - (6.19+2.54+3.44) = £6.19

Gross margin = 6.19/22.95 = 27%.

VAT collected is NOT 20% of the sale. It is 16.67% of the sale = £3.83. VAT paid is the VAT on the product cost + the VAT on postage = (6.19+3.44)*0.2 = 1.93. Total you owe HMRC = £1.90

 

[Lampre92]

Just ignore the VAT completely.

You paid £6.19 for the product.

You're selling it for £18.36. eBay charges you £2.54 for the sale. You paid £3.44 for the postage.

£18.36 - (6.19+2.54+3.44) = £6.19

Gross margin = 6.19/22.95 = 27%.

VAT collected is NOT 20% of the sale. It is 16.67% of the sale = £3.83. VAT paid is the VAT on the product cost + the VAT on postage = (6.19+3.44)*0.2 = 1.93. Total you owe HMRC = £1.90

Thanks for the reply!

I don't quite understand the 16.67% can you explain that further?
I thought the below would have had VAT charged on them so I would owe 20% (or 16.67%??)?
Postage cost (£3.44)
eBay fees (£2.54)
Product cost (£6.19)
Product sale (18.36)

I am even more confused now. Sorry

 

[japancool]

You add 20% to a price to get the sale price inc VAT.

100 x 1.2 = 120.

Deducting 20% is NOT the reverse of adding 20%. 20% of 120 is 24.

You DIVIDE by 1.2 to get the VAT ex-amount, then deduct it from the original.

120 - (120/1.2) = 20

This is the same as working out 16.67%.

120 x 0.1667 = 20

Your post suggests that 6.19 is the ex VAT price that you paid. If that is the inc VAT price, the calculation is different.

 

[Lampre92]

You add 20% to a price to get the sale price inc VAT.

100 x 1.2 = 120.

Deducting 20% is NOT the reverse of adding 20%. 20% of 120 is 24.

You DIVIDE by 1.2 to get the VAT ex-amount, then deduct it from the original.

120 - (120/1.2) = 20

This is the same as working out 16.67%.

120 x 0.1667 = 20

Your post suggests that 6.19 is the ex VAT price that you paid. If that is the inc VAT price, the calculation is different.

Ah! Yes I understand now. So it means my sale price excl VAT is not £18.36 it's actually £19.10?

 

[japancool]

Correct.

Ah! Yes I understand now. So it means my sale price excl VAT is not £18.36 it's actually £19.10?

19.13

 

[MikeCC]

Your original margin of 35% is correct.

Or without VAT
(19.13-6.19-6.19)/19.13 = 0.35