Profit Margins ruined by VAT


#1

Hi All,

I`m really struggling to get my head around this.

It is recommended to have a product with a profit margins around 30%. My product has this profit margin after taking all costs away - manufacturing, shipping, Amazon fees etc. After all the fees I`m also hammered with 20% VAT charge and that leaves me with 10% profit. Therefor PPC cost is eating any profits even if the PPC cost is is low as 30%.

There for my question is:

When sorcing the product and calculating profit margins should I be looking for 50% profit margin to cover the 20% VAT deduction, so I would be left with 30% profit margin to cover any of the PPC costs?

Kind regards

Naz


#2

only you know the profit margins you require for your specific business
do you also have staff, rent, rates etc that you have to cover ?


#3

There’s a really big IT company that targets 2% profit margin, but they sell in such huge quantities that they make a lot of money at that.
Your profit margin should take into account ALL costs, including VAT. But again the exact margin you aim for is entirely down to your business model.


#4

we had a B&M store a few years back with several competitors on facebook offering the same products at half the price (working from home, no staff etc)

we were busy enough at the prices we set so never lowered them

one of competitors became that busy, she no longer could manage from home and rented premises and got staff. Overnight she had to double her prices to cover her new overheads and over a short period of time, lost her customers and went bust !


#5

We used to have a B&M store too (before I started working here), one of our biggest customers was a greetings card shop over the road ( a big brand one but I forget which), they used to buy our products and sell them themselves for a profit…


#6

So the bottom line is that 20% VAT should be already calculated in when making the product reaserch and considering the profitability?


#7

Different things work for different people

In my first B&M shop I purchased direct from other shops in London for hard to get stock and resold at a higher price to make up the difference, I got good deals from managers as I was buying quite a lot.

Another time I took over an NCP Car Park lease on some waste land they could not make profitable enough. They employed somebody to stand their all day 6 days a week, cars were so badly parked they did not get many in. I employed somebody to open in the morning between 7-9am, did cheap all day parking for office workers and got 50+ cars in, it was always full. It also had a very profitable sideline for the ones that did not pay.

I wouldn’t be paying 30% ppc that is what seems to be ruining your profit, we pay <40% + VAT for our stock and I don’t pay for any PPC on Amazon, you are already giving them 15.3% and with the VAT man taking 16.7% you are losing 32% from the total.


#8

If you are not vat registered then yes


#9

Welcome to selling on Amazon.
Firstly, if your VAT registered, then VAT does not come into the calculation.
You work out your prices pre vat always. Otherwise you will charge incorrectly.
If your not vat registered, then obviously you do include it as you cannot claim any of the costs back.

However, as others have said previously, what you make on a product, is what you are happy with.
What other people do or don’t do, really has no bearing on it.

Or to look at it another way. You sell 1 item per day for £50, but make £25 profit (50%) on it. That’s £175 per week profit.
You could however sell 50 items for £2 each, make £1 profit (50%) and make exactly the same.
In the first case however, it considerably less work, though with a higher probability of losing money because of returns/ lost in post and so on.

Obviously those figures can be changed around a lot. You just have to find what your happy with and go from there.
And just for the record, unless you are selling your own brand etc, then you really don’t need to pay for advertising. I have literally not spent a penny on it in years.


#10

Thank you all for sharing your opinions it`s really appreciated.

Unfortunately I have few more questions:

El-Aguila - You mentioned 16.7% VAT. I`m on a standard rate VAT scheeme and I pay 20% VAT. Why is your VAT figure lower?

The_Little_Shop - You mentioned if Im not VAT registred I should calculate the VAT, isnt it the oposite? I need to calculate the VAT into the profit margins as I`m VAT registred and I need to pay 20% on sales?

I understand that the in-put VAT is reclaimable but my main concern is the output vat of 20% taken out of my sales.

Neil - I think I needed to specify that Im concerned about the output VAT. Input VAT Im reclaiming back on my tax returns, but the output VAT is added to my sales (as non-uk resident) amazon is with-holding output VAT and submiting it directly to HMRC. When doing product research I didnt calculate this cost in and Im now left with 20% less margin as I anticipated.
I just wanted to make sure that I understand everything correcty this can not be reclaimed and I either need to increese my sales price or I need to calculate the 20% output VAT into the profit margins when searching for a new product.

Neil - you also mentioned that PPC you havent used in years. I find as soon as I turn off the PPC the rank drops and Im getting bearly any sales. How do you maintain your rankings/sales without PPC?

Sorry about all the questions.

Kind regards

Naz


#11

It depends on how you calculate.

£100+VAT = £120.00

If you sell an item for £120.00 you do not pay £120.00 x 20% = £24.00, you Pay £20 | so the percentage of your gross sale is £20/£120 = 16.7%

I would suggest that you seek proper financial advice by somebody that understand all your circumstances


#12

Great, thank you I understand now :slight_smile:


#13

what does PPC stand for?


#14

pay per click - ads basically.


#15

Big bucks for Amazon basically. The fees they charge are obviously not enough, this is the cherry on the top if you choose to pay for it.


#16

I think someone answered about your output vat already. But to add to it whether amazon or you pay it is immaterial as you still have to account for it on your return.

As to advertising it depends on what you sell.
Everything i sell is well known and basically sells itself. But if it’s not that’s a different matter.


#17

I had this issue when going over the vat limit - needing to register etc - and seeing my profits fall as a result of having to pay - as I was then - the flat rate scheme 6.5 % which became 7.5%

The amount of vat I was paying was eye watering.

However - I actually found that the standard rate scheme for my model was far better and switched schemes. 50% of my sales are overseas and therefore 0 rated. So I am only paying vat on half my sales and claiming back a ton of input vat - the vat on my ebay fees alone wipes out a huge amount of vat I have to pay on my sales - and then of course all the input vat on my supplies. The end result is I pay a very comfortable amount of vat every 3 months. 1/5 of what I was paying!

I am not sure about your exact model - but you must have significant inputs that you can reclaim against your output tax. Or is the problem that amazon are deducting the vat and paying it on your behalf? But if you have a vat number you should be submitting your own returns and paying vat direct to hmrc. Amazon only deduct vat when you have not uploaded a correct vat number.


#18

Remembering of course that the Amazopn “fair price policy” might not enable you to price high enough !


#19

Profit margins don’t mean much without turnover/sales.
Some of my most profitable items have the lowest profit margin but I sell 100 to 1 against many of my other products,
So, for a crazy example, which is better?
“The profit margin I make on item x is 33%, I sold 2 last month and earnt £6”
or
“The profit margin on item y is 6%, I sold 2,000 last month and earnt £3,000”


#20

What I don’t understand is how these people can’t work out that they are undercutting every other seller at own detriment. They go blindly on doing the same thing, not working out their costs correctly.

The problem is they damage the sales of other sellers, all of whom have to put up with this stupidity while they learn that it is not going to work to be the cheapest because they have not actually made enough to pay their bills. Why they can’t see that there is actually a price that they can’t go below to make anything at all escapes me.

They are not buying the products any cheaper than the other sellers they just can’t count.