My store prices include VAT; how do I work out my real profit margin?
Extract the tax from the shelf price first, then measure the margin on the price before tax. A product selling at 230 that costs 140: with 15 entered as the rate, the net price is 200 and the real margin is 30%, not the 39.13% you get by measuring against 230.
Where the mistake hides
When you show prices including tax, 230 is the number you see every day. So you take away the cost of 140 and call 90 your profit. But part of that 230 was never yours: it is tax collected from the customer and paid on to the tax authority. Measure the margin against the tax-inclusive price and you are counting that tax as profit.
Your reports then look better than reality, and you may plan discounts or promotions around a margin that does not exist.
The right calculation in two steps
- In the VAT calculator, choose Extract tax from a gross amount, enter 230 and the rate that applies to you, here 15. Result: net 200, tax 30.
- Open the Profit margin calculator and enter a cost of 140 with a selling price of 200. Result: profit 60, margin 30%.
Compare that with the wrong version: a cost of 140 against 230 gives a profit of 90 and a margin of about 39.13%. That is nine percentage points of margin that are really tax you do not keep.
What goes in the cost field?
The first step fixed the price side, but the cost deserves the same care. If you reclaim tax on purchases, use the supplier cost before tax so both sides sit on the same basis. If you cannot reclaim it, the full amount you paid is your cost. Which of those applies to you is for your accountant to confirm.
Apply it across your catalogue
You do not need to repeat this for every order. Build a small sheet once for your main products with three columns: shelf price, net price from the calculator, and real margin. Revisit it whenever a price, a cost or the rate changes.
- A product with a thin real margin cannot carry a big discount.
- A product with a healthy margin can anchor your promotions.
- Anything close to zero needs its price or cost looked at.
Common questions
Can I just take the rate off the tax-inclusive price?
No. Taking 15% off 230 gives 195.5 rather than 200, because the tax was charged on the net price. Use extract mode.
Does the VAT calculator give me the margin directly?
No, it gives you the net price. You work out the margin in the profit margin calculator.