How to Calculate Profit Margin
Check your own figures
Cost including carriage on the left, selling price excluding VAT on the right.
Fill in the fields above and the answer appears here.
What is the method?
Four steps, and people skip the first one, which is where most of the trouble downstream comes from.
- Put both figures on the same basis
Take VAT out of the selling price if you are VAT registered, and put carriage inwards and packaging into the cost. Comparing a gross price against a net cost is the fastest way to invent a margin you do not have.
- Subtract the cost from the price
What remains is the gross profit on that sale, in pounds. Keep this number; it matters as much as the percentage.
- Divide the profit by the selling price
Not by the cost. Dividing by the cost gives markup, which is a larger number and a different question.
- Multiply by 100
That turns the decimal into the percentage everyone quotes.
A worked example, start to finish
A homeware retailer buys a lamp. The invoice says £26.40 each for a box of six, plus £9 carriage on the box. It sells for £59.99 including VAT.
Step one. Carriage per lamp is £9 ÷ 6 = £1.50, so the true cost is £27.90. The selling price excluding VAT is £59.99 ÷ 1.2 = £49.99.
Step two. £49.99 − £27.90 = £22.09 of gross profit.
Step three. £22.09 ÷ £49.99 = 0.4419.
Step four. 44.19% margin.
Compare that against the shortcut most people take: £59.99 minus £26.40, divided by £59.99, which returns 56%. Nearly twelve points of margin that does not exist, produced by leaving VAT in and carriage out. Both errors flatter the number, so nobody goes looking for them.
How do you do it for a whole month?
Use totals, never averages. Add up net sales for the period, add up cost of goods sold for the same period, run the same four steps on those two numbers.
Averaging your individual product margins gives a different and misleading answer, because it treats one £2 greetings card as equal in weight to a £900 sofa. A shop selling mostly cards and occasionally sofas would end up reporting a margin that describes neither of them.
Two adjustments before you divide. Take returns and refunds off sales, and take supplier credits and rebates off cost. Both usually live somewhere other than the sales and purchase totals, which is exactly why they get missed.
For the figures below the gross line, move on to the operating margin calculator and then the net profit margin calculator.
Where does the calculation usually go wrong?
Five places, and every one of them makes the number look better than it is.
- VAT left in the price, which adds ten to twelve points at the standard rate. Our VAT and profit margin guide covers it in full.
- Dividing by cost instead of price, which produces markup and calls it margin. See margin vs markup.
- Carriage and packaging left out. On low-value items these can be a quarter of the true cost.
- Using the ticket price rather than what the customer paid. Every promotion you run moves the real margin down.
- Card fees ignored. One and a half percent of revenue is one and a half points of margin, on every sale, forever.
Once the method is second nature, the fastest route is to let the tools on Margin Calculator UK do the arithmetic while you use the working shown underneath to confirm you fed them the right numbers.