A sales margin is a business evaluation and management tool which identifies the percentage of the difference between gross sales revenue and the cost of goods sold. The marginal percentage may also be called a retail margin. In order to determine the margin for retail sales and other businesses offering goods and services, businesses should select a monthly, quarterly, or annual time period and use accurate gross sales and cost information.
Determining Dollar Value of the Sales
After a business has selected the time period for which they want to evaluate the margin of sales, they should determine the total or gross sales during that period. Gross sales should include every dollar received from sales activities during the period. Gross sales should not include allowances for reduced prices, discounts, or returns. A business can choose to include discounts and returns as a separate line item in its budget and financial reports or can include these cost in the Cost of Goods Sold or COGS.
Determining Cost of Goods Sold
The next step in determining the margin is calculating the COGS (Cost of Goods Sold). In addition to the total value of returns and discounts, cost of goods sold includes the cost of materials used or merchandise purchased. The budget line items for Cost of Goods Sold will vary depending upon whether the business is a retail, manufacturing, or wholesale business. In addition to the actual purchase price of materials (manufacturing or wholesale) or merchandise (retail), direct labor cost, monthly overhead costs, and shipping and delivery costs should be included.
The Role of Inventory
The value of inventory should also be included in a Cost of Goods Sold calculation which will provide a retail sales margin. Beginning inventory at the beginning of the sales period plus any new inventory that is purchased will provide the ending inventory figure. If the physical inventory doesn’t match the accounting book balance, the difference must be subtracted from the Cost of Goods Sold. This amount represents missing inventory which is a business challenge as well as a cost.
Calculating Sales Margin
First, subtract the Cost of Goods Sold from the Gross Sales, and ensure you have accounted for changes in inventory. The result will be a dollar figure that represents the margin of sales. Divide this dollar figure into the total of gross sales, which will provide you with a percentage that is referred to as the sales or retail margin. If a company makes $30,000 in gross sales during a month and their COGS and inventory differences total $15,000, then the margin of sales will be 50%. If the difference is $10,000, then the margin of sales will be 33%. Some businesses will have a very slim margin of sales. According to Arizona Central, conventional grocery stores have a margin of only 1 to 2 percent, while natural and whole food grocers may have a margin of 3 to 6 percent.
Determining the retail margin for sales in a store, or calculating the margin for a manufacturing business, importer, or wholesaler is a valuable way that businesses can plan to earn higher profits. The margin for sales will also be important if a business wants to seek outside investment or apply for a loan to build a new building or buy new equipment and furnishings.
