Mark-up and margin are two terms used when talking about accounts, costs and pricing. Both are important measures to use in making key business decisions. Ensure you have a good understanding of both.
What is Mark-up?
Calculate mark-up using the direct cost as a base and applying a % increase to arrive at selling price.
Mark up is expressed as a percentage with reference to cost price:
e.g a product with a cost base of £100 & a selling price of £120 will have a 20% mark-up.
Mark up is a good tool to use in the initial stages of a business to set sales prices.
Accurate mark-up calculations help to set a selling price which generates profit and is competitive within your market.
What is Margin?
To calculate margin deduct the cost of goods or services from sales. This figure is your gross margin. Expressed as a percentage it is called your ‘Gross Profit %’. The % is calculated with reference to sales.
e.g. a product with a selling price of £120 and direct costs of £100, will have a gross margin of £20 and a gross profit % of 16.7%.
Why is understanding the difference so important?
Most business owners and sales people talk about ‘mark-up’, while financial people always talk margin. That leaves scope for confusion between these types of people as they are not comparing like with like!
Imagine the disappointment if you think you are ‘making 50%’ when, from a different perspective, you’re only ‘making 33%’?
A profit making business has a mark-up % that is higher than the margin.
Where mark-up is lower than margin, the selling price does not cover costs and the business will be making losses.
Use markup to set prices, with reference to your direct costs to ensure your sales are profitable.
Use margin to calculate and monitor your gross profits to assess how sales are impacting your ‘bottom line’.
How can Wessex help?
Firstly, our management accounts processes, which routinely include calculation of and review of margins, are designed to provide you with robust, detailed information.
Secondly, our use of Xero, allows timely reporting which can analyse the cost centres within your business for more in depth insights into your margins and other Key Performance Indicators (‘KPIs’).
Finally, we regularly ‘check-in’ with all of our clients, ensuring our advice is relevant, practical and commercial and not just ‘based on the numbers’.
For further help and information regarding costings, mark-ups and margins, please do not hesitate to contact the team at Wessex.