VAT,profit calculation

[league_of_ordinary_men]

I am a little confused about how my competitor makes money can someone please help with this calculation.Lets say the cost price I get a product for from my supplier is R100 excluding 14% VAT so the total for the product from the supplier is R114 now + 5% profit = R119.7 now I am not registered for VAT yet so I don't charge my clients VAT but he is registered,so now if the price is R114 from the supplier how can he make profit(5%) when the total he charges is R119.7 when the VAT(14%) he charges is more then the (5%)profit he makes?I know I am just missing something.

[Blurock]

There is a difference between MARK UP and profit. Get to understand that before you start losing money.

[Dave A]

Blurock is right - what you're describing is markup, not profit margin which is a percentage of turnover. But let's stick to the numbers you're working with to explain how your competitor is still making a profit.

As an unregistered vendor your position is simple - you buy the product at R114 and sell it at R119.70 - you make R5.70.

Your competitor does the same, except he/she is VAT registered. Your competitor will make R5.00 and will have to pay over 70c for VAT to SARS - the value add portion.

	Gross	Nett (ex VAT)	VAT
Output (Sales)	119.70	105.00	14.70
Input (Costs)	114.00	100.00	14.00
VAT owed			0.70
Profit		5.00

[IMHO]

	Incl.	Excl. (ex VAT)	VAT
Sales	119.70	105.00	14.70
Costs of Sales	114.00	100.00
Output VAT			14.70
Gross Profit		5.00 (4.76%)(5% MU)
Expenses		4.00 (3.8%)
Input VAT on COS			14.00
Input VAT on Exp.	2.28	2.00	0.28
VAT Due			0.42
Nett Profit		1.00 (0.95%)

Dave A, I have butchered your table a bit!

[Dave A]

Dave A, I have butchered your table a bit!

Well done. Not everyone grasps how to use tables (it is a bit fiddly, isn't it).

[IMHO]

Well done. Not everyone grasps how to use tables (it is a bit fiddly, isn't it).

Yes, I was intrigued by how you did it, so replied to your post with quote, to see what you did and use it as a template! Cheated!

[league_of_ordinary_men]

Hi blurock and Dave A.Thanks for the input.Blurock,I am not trading yet that's why I am asking these questions to clear up some stuff.We all have to learn some how and that's why I am thank full for people like you on a this form.Dave A,thank you for your example,it put me on the right track.

[league_of_ordinary_men]

Dave A,so in your example my competitor only pays VAT on the profit he makes and not on the mark up?

So he/she only charges VAT on his profit?
What happens to the VAT he payed for the product to start with?

As I under stand it he/she is registered for VAT so he/she can clam that VAT(R114-14% VAT=R100 so he/she get's R14 back?)?
Now that brings me to another question do you think I should register for VAT because if I have allot of sales I can clam back that VAT(Right or wrong)?

[Dave A]

So he/she only charges VAT on his profit?

Not quite. He deducts the VAT he's been charged by his suppliers. If his supplier was not a registered VAT vendor, he'd have nothing to deduct and would have to pay SARS R14.70.

What happens to the VAT he payed for the product to start with?

That was paid to SARS by his supplier (less any VAT the supplier was charged on his inputs).

Now that brings me to another question do you think I should register for VAT because if I have allot of sales I can clam back that VAT(Right or wrong)?

That's where things get interesting. When you have the choice as to whether to be VAT registered or not, I suggest the biggest factor is whether your clients are VAT registered or not.

From the original example, the non-registered vendor is making R5.70 whereas the registered vendor is only making R5.00, so at first glance being non-registered is an advantage. However, if your client is VAT registered and can claim the VAT portion back, effectively the purchase would only be costing them R105.00 instead of R119.70 - which means being a VAT registered supplier to a VAT registered client gives you a price advantage.

You could even sell the product at a 15% markup and still be beating the unregistered vendor's effective price by a nice little margin

You need to understand your market and play with the numbers.

[IMHO]

It is never in your interest to be VAT registered. If you have a choice, do not register. As others have said, the market can force you to register, while SARS is not. This happens when your customers is registered as well and they want to claim their input VAT. This is the only time that you should consider registering, because registered customers simply will not buy from you, if you are not registered. Even then, do a calculation on the portion of customers that is registered. If it is a very small percentage of your business, you can afford to lose them and still make more money.

However, if your customer do not want to claim back, you charge the same price or slightly less than your competitor who is registered and still make more money. You can use this advantage of not being registered to make more profit, or, cut your price to be more competitive.

Also keep in mind, to be registered puts a lot more administration on your plate. Actually, it is a pain in the 'backside'.

To come back to Gross and Markup. It is important to understand the difference.

Cost R100
Sell R120
Markup = 20%
Gross = 16.667%

Formula Markup: (Sell-cost)/cost*100
Formula Gross: (Sell-cost)/Sell*100

Why is it important?
Say you work out your expenses is 15% of your turnover. You want to make 5% more as profit. So, you must make 20% profit to achieve your goal. Is this 20% Markup, or 20% gross?

Let us put it another way.
Sales R120 000
COS R100 000 ( COS=cost of sales. You marked up your stock you sold by 20% MARKUP)
Gross Profit R20 000 ( 16.6%) (R120 000 minus 16.667% = R99 999.60)

Expenses R15 000 (Energy, wages, rent etc)

Nett Profit (R20000-R15000) = R5000 (4.17%)

The danger is that you fall into the trap of starting to mark up your goods by 16.6%, thinking that that is what you need. You will then just make R116 667 sales and have a shortfall on your goal, with nett profit of R 1 667.

Also, when speaking to other people and you hear their strategy on profit and percentages, make sure you understand what they mean, as there is as you can see, a huge difference. At the end of the day, it is easier to use markup to set prices, as long as this markup is high enough to cover the difference of gross and you understand what you are doing.