6 Things that business people should know, but often don’t

1. A gross margin is not the same as a mark-up. If a product costs £1.00, a mark-up of 33% will produce a selling price of £1.33, which is a gross margin of 25% ((£1.33 - £1.00) / £1.33).
   
2. If you want a gross margin of 33%, take the cost price of £1.00 and divide it by 0.67, (100 – 33 / 100) which equals a price of £1.49. If you want a GM of 40%, then divide by 0.60, (100 – 40 / 100), which equals £1.67.
   
3. If you have vat inclusive price and you want to arrive at the pre-vat net figure, divide it by 1.175 (for the UK vat rate of 17.5%, or if the vat rate is 12.5%, then divide it by 1.125). For example, is the price inc. vat is £3.99, then the net price is (3.99 / 1.175) = £3.40.
   
4. To calculate your gross margin from a vat inclusive selling price, first take off the vat using the calculation in No3. Then find the cash margin by taking the cost from the selling price (less the vat) and divide it by the selling price. So if the selling price is £1.99 inc vat and the cost is £1.00, that calculation is: (1.99 / 1.175) - £1.00 / (1.99 / 1.175) = 41%.
   
5. Assume your gross margin is 33.3%. If you have a sale and reduce your selling price by 10%, you will have to sell 43% more units to make the same cash margin. For example, if your cost is £1.00 and your selling price £1.50 + vat, for every 100 units you will make £50 gross profit. If you reduce your price by 10% to £1.35 + vat, you will need to sell 143 units to make £50 gross profit. The required increment varies according to the base GM%, so if your gross margin were 50%, you would have to increase unit sales by 25%.
   
6. ‘Price’ is what you sell at and ‘cost’ is what you buy at. If you always use these terms in your business you will avoid the frequent mistake of selling goods at your cost + vat and maybe, buying at your selling price!

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