If you have ever wondered exactly what a 'Mark-up' is, or how it differs from a 'Margin', look no further.
The Mark-up - What you multiply the Cost Price (CP) by to get the Selling Price (SP). Usually expressed as a percentage such as 50% or 100%. Plus VAT if appropriate - see below.
A 50% margin would be half as much again (i.e 1.5 times the CP), a 100% margin would be doubling the cost price (i.e 2 times the CP) and 150% would be one and a half times (i.e. 2.5 times the CP)
Margin - Confusingly, Margins are also expressed as a percentage but a Margin is the return on sales. This is what you make after you have paid for the cost of what was sold. Margin=(SP-CP)/SP x 100
Margins have more than one use. Since it is related to the Mark-up (i.e. a Mark-up of 100% will generate a Margin of 50%) Margins are a useful check on the business. If the SP is calculated to generate a 50% Margin, but the Profit and Loss is showing a Margin different from 50% then something unforseen is causing that and needs to be investigated.
I want a Margin of... If you want to acheive a specific margin simply take your Cost Price and divide it by 1 minus the desired Margin expressed as a decimal (i.e. CP/1-M). Again add VAT if appropriate.
If you want a Margin of say 70%. divide the CP by 1-0.70, i.e.CP/ 0.30. Alternatively make the CP 1, and add 1 to the answer to give you a Mark-up factor to multiply by. Thus 1/1-0.70 would give you 3.33, add 1 to give 4.33 and this is the Mark-up factor that will give you a 70% Margin (i.e. CP times 4.33 will give a 70% Margin) and so on.
To Add/Remove VAT - Easiest method is simply to multiply by 1 plus the VAT percentage expressed as a fraction. Thus to add 20% VAT, multiply by 1.20, or to add 5%, multiply by 1.05
This works both ways, to add the VAT - multiply, or to remove the VAT - divide. This gives you the VAT exclusive price. If you need to work out the VAT content of an inclusive price, DO NOT multiply by -20% see below.
To work out the VAT content - multiply by the VAT fraction for whatever the VAT rate was, for 20% it is 1/6, for 17.5% it is 7/47 for 5% it is 1/21
This method gives you the actual VAT content of a VAT inclusive price.
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