Working out Profit on a Per Product basis..

[JJWinst]

Does anybody else work out profits per product rather than a set % across the board?

I have recently gone VAT registered and want to ask whether I am doing the Calculations correctly. This is what I am inputting:

Cost EX Vat + Postage + Fees = Total Cost of product.

Profit = Total Cost of Product - Selling Price (Includes Post & VAT)

Vat Owed (20% of Selling Price) - Profit = Profit/Loss after VAT.

VAT Reclaim + Profit/Loss = Total Product Profit/Loss.

I realise I've probably made that more confusing than it needs to be, but is that about right?

 

[MidlandFoodService]

First off i would ignore the VAT as you claim back what you spend and your customers pay what you sell. If that makes sense. So in theory you are a tax collector.

So that could make your calculations simpler.

I work mine out on a sales price - cost price for each invoice and then total up each week and minus my expenses. But i have in house distribution so i cant give a figure for each product on transport costs.

I think to work out a set % across the board would be a bit too dangerous unless all of your products have an equal margin. How could you work it out if you sell mainly low margin products this week, or a job lot on the cheap. Ruins your figures.

I will probably get a lot of people who disagree here but it works for me and i am not instructing you on how to run your business, just sharing my views.

 

[Louie]

"Does anybody else work out profits per product rather than a set % across the board?" Yes, certain products are more competitive or different in purchase nature so attract a different margin.

"Cost EX Vat + Postage + Fees = Total Cost of product." Correct.

"Profit = Total Cost of Product - Selling Price (Includes Post & VAT)" Well no, you have it the wrong way around.

"Vat Owed (20% of Selling Price) - Profit = Profit/Loss after VAT." Wrong.

VAT owned is simply 20% of the selling price. You then separately deduct all the VAT you have paid (on cost price, delivery etc) from this total.

"VAT Reclaim + Profit/Loss = Total Product Profit/Loss." Not sure what you are getting at here.

Don't simply ignore VAT. There can be a big difference between the VAT you pay to buy the product and the VAT you have to "collect" when you sell the product. Also as some products are non VAT this effects the margins of profit on products.

You can design a simple profit calculator on a spreadsheet to help you price a product based either on margin, exact profit, or to see your profit based on a selling price.

 

[Pish_Pash]

I think you're way over complicating it.

First as MidlandFoodServices says...you're an unpaid VATcollector for HMRC, whilst you need to have a good feel for how VAT impacts things, in my opinion you should not fixate on it.

A rough ballpark is needed to set the retail price (knowing roughly what your costs/fees are) here's how I set a retail price..

Take the Landed cost (I import, therefore the cost of the product in sterling plus the cost of freight, plus import duty)

Now Double it **

Now add the VAT!

Simples - using this method, unless your selling fees & ongoing business costs are jaw droppingly high, you'll be in reasonable profit....why would you want to go all anal & work out to the penny the absolute profit per product?

**This is the part that's very much open to 'what the market will stand' ...if I can get away with more than double (without impacting sales too much), then I will do, conversely if sales are weak due to some psychological price barrier being breached, then I reduce.

Seriously, you'll go bananas trying to lob the kitchen sink into your running profit calculations...this is what accounts software does for you (i.e. you add your sales, your commission/fees & expenses say on a monthly basis...and you'll get net profit - it's this running figure that's key, not how much profit your trouser on a per product basis)

 

[Bob]

Just to be clear. Output VAT is 20% of the selling price net of VAT but 1/6th of the selling price including VAT.
Have mentioned this as OP said his selling price included VAT but then said that VAT was 20% of the selling price

 

[JJWinst]

"You can design a simple profit calculator on a spreadsheet to help you price a product based either on margin, exact profit, or to see your profit based on a selling price.

This is what I am trying to do..

Now Double it **

Now add the VAT!

I sell in a very competitive market where I need to compete on price to gain sales. Sure good customer service / free delivery / a good website etc can all help, but generally price is king.

Working out profit will enable me to see if certain lines are worth keeping. If I can keep some sort of calculator of costs + fees + postage minus VAT owed I can see whether a product is profitable.

Just to be clear. Output VAT is 20% of the selling price net of VAT but 1/6th of the selling price including VAT.
Have mentioned this as OP said his selling price included VAT but then said that VAT was 20% of the selling price

Sorry I'm not following, VAT is 1/6th of my selling price INC VAT?

So e.g Item x including post is £20.00 (What is the VAT owed?)

 

[Pish_Pash]

Sorry I'm not following, VAT is 1/6th of my selling price INC VAT?

So e.g Item x including post is £20.00 (What is the VAT owed?)

Divide by 6, therefore £3.33 is the VAT element (or if you want to see what you'll receive after VAT divide by 1.2 therefore £16.67). Coming back to profit per item, it's do-able on the likes of ebay, but if you ever go Amazon FBA it'll be too cumbersome.

 

[JJWinst]

Divide by 6, therefore £3.33 is the VAT element (or if you want to see what you'll receive after VAT divide by 1.2 therefore £16.67). Coming back to profit per item, it's do-able on the likes of ebay, but if you ever go Amazon FBA it'll be too cumbersome.

Ok got it. We do use FBA, why can't the same calculations be used? This will be used only as a rough guide to ensure item's aren't loosing money.

For example;

Item Cost (EX VAT) + Postage + fees = Total Cost

Total Cost - VAT OWED + VAT CLAIMED = Profit/Loss

Will that not work?

 

[Pish_Pash]

Ok got it. We do use FBA, why can't the same calculations be used? ?

Because unlike ebay/paypal (where the fees are static & therefore easily calculated) FBA uses many criteria to calculate fees ...size, weight, shipping service selected, whether it was sold abroad (e.g. cross border fee)....basically there are many fees & hard to nail down to the penny! You can have a situation where same product is sold to two different customer & the fees will be different each time....you can get close, but I'd say it'd be too cumbersome to nail to the penny for every transaction.

re working out your profit, here's how I do it...

(Selling price including Postage) - VAT - fees) minus the Item Cost (excluding VAT) = Profit

 

[JJWinst]

The good thing about AMAZON is it has a live area which shows ALL FEES which include FBA fees, so I can see the exact cost of post/fees with FBA.

Thanks for all your responses. I will let you know how I get on.

 

[BigTimeTrader]

I think you're way over complicating it.

First as MidlandFoodServices says...you're an unpaid VATcollector for HMRC, whilst you need to have a good feel for how VAT impacts things, in my opinion you should not fixate on it.

A rough ballpark is needed to set the retail price (knowing roughly what your costs/fees are) here's how I set a retail price..

Take the Landed cost (I import, therefore the cost of the product in sterling plus the cost of freight, plus import duty)

Now Double it **

Now add the VAT!

Simples - using this method, unless your selling fees & ongoing business costs are jaw droppingly high, you'll be in reasonable profit....why would you want to go all anal & work out to the penny the absolute profit per product?

**This is the part that's very much open to 'what the market will stand' ...if I can get away with more than double (without impacting sales too much), then I will do, conversely if sales are weak due to some psychological price barrier being breached, then I reduce.

Seriously, you'll go bananas trying to lob the kitchen sink into your running profit calculations...this is what accounts software does for you (i.e. you add your sales, your commission/fees & expenses say on a monthly basis...and you'll get net profit - it's this running figure that's key, not how much profit your trouser on a per product basis)

In a bricks and mortar store that is quite standard (though if I was importing direct I would be wanted to triple not just double) and that will give you a profit margin of around 40%.

However if you are selling on the marketplaces which take say 15% on average from your final selling price then your mark up of "double + VAT" is not enough, all of a sudden your profit margin becomes more like 10%

The problem we found is that because our postage costs (RM and PF) are 80% of the time the same price or higher than our item cost then this skews the traditional B+M mark up approach.

When selling on the marketplaces there are so many extra costs of sale: postage, commission, packaging etc.

For ourselves and many other long term traders we know well, (selling on ebay/amazon over 10 years), it is more like item cost x 3 or x 3.5.

anyway that works for us, we have been doing it a long time and our still here (and growing), others I have seen come and go.

P.S. always work out same comparision so either all figures ex. VAT or all figures inc. VAT)

 

[Deleted member 59730]

I have never been able to get figures to work at less than 4x the cost of the item. My customers, shops then double it and add VAT. I then work out a budget for all the different aspects like sales, admin etc and work hard to keep everything within reason.

I once met a millionaire businessman who worked on a 5% margin. I couldn't believe it until he told me about the 5 bankruptcies!

 

[Pish_Pash]

I have never been able to get figures to work at less than 4x the cost of the item. !

I'm sure once a business takes on staff, bigger premises then yes, the multiple will need to be higher, but at the minute...

Strategy - me, copy creator - me, IT support - me, bookeeping - me, dispatch - me, product support - me, ordering - me , etc

So a multiple of about 2.2 to 2.5 works for me