# How is the commercial margin calculated?

By Sarah Swasembada Nov 16, 2023

Invoicing is good, but being profitable is even better. The commercial margin helps you calculate the profitability of your products and your company, that is, the ability to obtain the benefits you are looking for.

## What is commercial margin?

The commercial margin is the relationship between the purchase price of goods and their selling price. This figure provides a view of the company’s profitability by analyzing the cost of goods sold.

This margin allows a company to position itself in relation to its competitors. The calculation is mainly applied to trading and distribution companies.

The amount corresponding to the commercial margin must allow the company to finance its operating and production costs.

## Importance of measuring the commercial margin

The commercial margin is an important indicator for companies, as it allows them to calculate the margin percentage, that is, the relationship between the margin and the turnover without VAT.

The calculation of the commercial margin index of the different products or services makes it possible to measure the individual contribution of the products or services to the overall results of the company.

The calculation by product/service or group of products/services can serve as a basis for setting your sales prices. The commercial margin will then guide the company’s pricing policy.

By comparing margin rates with the competition, it is possible to evaluate whether sales prices can be reduced, with the aim of gaining market share, without having a negative impact on profitability.

The commercial margin is an indicator of the income statement that informs about the level of profits of the company and, therefore, about its profitability and competitiveness.

## How is the commercial margin calculated?

It is essential to define the tax-free margin to eliminate the notion of VAT. The calculation of the commercial margin is very simple. This is the formula:

Commercial margin = turnover without taxes – purchase cost of the goods sold

It is also interesting to calculate the margin index, which is the percentage of margin achieved in relation to the sales price. It allows you to evaluate the profitability of the company in the sale of a product. It can also be used to determine the profit margin:

Sales margin index = (sales margin / turnover without taxes) x 100

Increasing your commercial margin is a positive action that contributes to the profitability of your company. There are different ways to increase the margin: increase the sales volume of goods, increase the sales price of goods, better manage stock rotation to avoid fads or obsolescence of a good or service, reduce the price of purchase of the goods (maintaining the same sales price), etc.

## Conclusion

If this calculation is important, it is also essential to know how to analyze and interpret them correctly to make the appropriate decisions necessary for the correct management and sustainability of your business. A financial dashboard is the best tool to track this and other indicators of your company.