I am sure many people already know this, but my intention is for new entrepreneurs who may not yet know. For those who already know, you can skip reading or you can consider it as a review only. If you think it’s appropriate, you can share this with 2-3 acquaintances who you think may need it.
Most entrepreneurs sometimes are not very familiar with how to set the cost price of the product from the supplier, operations and marketing, to the final price suitable for sale to buyers. The price is for markup and the profit of the goods. Do the traders really know what they are doing and selling?
Most traders fail to calculate and end up losing money every month.
The products are sold out and the gross sales figures are very good, but in the end, after closing the books, they still suffer losses. Why does this happen? How to calculate Markup Margin and Profit Margin? They sound almost the same but have different meanings.
For traders who are involved in ‘trading’, which is taking from the supplier and selling directly to third parties, the calculation is quite easy. But for traders who make products from raw materials, such as a bakery, the final cost calculation is a bit difficult, but the calculation method is still simple. You don’t need calculus or algebra to solve it.
How Does Markup Margin Work?
Trading is all about buying and selling. It’s about buying and selling. I buy from supplier A and resell to customer B. I buy from supplier A in bulk and resell to customer B at retail. The price I get is much cheaper than their retail price.
For example; Buy from a supplier – RM10.00. Sell to customer – RM13.00. I get a profit of RM3.00 from the above transaction.
Question; What is my Markup Margin? What is my Profit Margin? Buy RM10.00 Sell RM13.00. Profit RM3.00.
Markup Margin? Profit Margin? Difference between Markup Margin and Profit Margin
RM10.00 + 30% = RM13.00
Markup Margin, we simply add a percentage to the purchase price from the supplier, and here most traders make a mistake by adding 30% which is considered a profit of 30%.
How Does Profit Margin Work?
RM3.00/RM13.00 x 100 = 23%
Mistakes Made
How can I only get 23% when I added 30% from the original purchase price? Here, most traders make a mistake where the actual profit is 23%, not 30%. When this calculation is wrong, at the end of the calculation, the company is found to be overspending and experiencing losses. Markup Margin can be added by how many percentage points or thousands of percentages.
So as entrepreneurs, we must know how to make calculations so as not to overspend with the profit obtained.
If the Profit Margin is only 23%, spend only 15%, including utility costs, salaries, and various other costs, not spending as much as 30%. This is why your business is losing money all the time because you need to add capital for operating costs.
Markup Margin can be added directly according to the suitability of the business, whether it is tens, hundreds, or thousands, you can calculate it yourself.
The amount of Profit Margin is less than 100%. If you don’t believe it, do the calculations happily. So from the case above, how can we maintain a 30% profit margin and what is the required markup margin?
Markup Margin:
RM10.00 + 43% = RM14.30
Profit Margin:
RM4.30/RM14.30 x 100 = 30%
So the Markup Margin is 43% in order to achieve a Profit Margin of 30%.
All calculations of Markup Margin and Profit Margin are based on the calculated costs, for example, Ahmad’s business may have a lower rent and fewer employees compared to Ali’s store located in the city centre with higher rent and more employees. Therefore, Ali’s prices are likely to be slightly higher than Ahmad’s.
Example:
30% will be used for:
- Company savings
- Bills
- Rent
- Salaries
- Taxes
- Loans
- Marketing expenses
- Other expenses
This is just an example of costs that need to be deducted every month and ‘Company Savings’ refers to savings that will be used when we want to expand the business.
Remember to include marketing and transportation costs if necessary. Transportation costs include petrol and vehicle repairs if any; in case of any damage to your vehicle.
Simple Formula
I will share another simple calculation formula for an entrepreneur or trader who has a goal of achieving monthly sales with a predetermined profit margin.
Target Profit Margin = 30%
Monthly company operating cost = RM4,000
RM4,000 / 30% = RM13,333
So, you need to make sales of RM13,333 every month to cover your business operating costs. The lower the profit margin, the more gross sales are needed, and the higher the profit margin, the fewer gross sales are needed. The more profit taken, the less gross sales need to be achieved.
I hope that the calculations of Markup Margin and Profit Margin will help you to re-calculate the company’s profits before you continue to experience losses.
