If you record the sale of products or services, you can easily see margins and markups in QuickBooks. First, we need to understand some terms.
- Gross Margin (also called Gross Profit) is simply the total received for selling your product or service minus the costs of selling that product (cost of goods sold). If you sell a product for $40 and the cost is $30, your gross margin or gross profit is $10.
- Gross Margin Ratio is the gross margin amount as a percentage of sales. In our example, $10 profit divided by $40 sales price is 25% gross margin ratio.
- Markup is the difference between cost and sales price. In our example, $10 is the amount of the markup.
- Markup Ratio is the gross margin divided by the cost. In our example, $10 profit divided by the $30 cost is 33.33% markup ratio.
Using Margins and Markups in QuickBooks
When you setup an inventory item or a service from a contractor, you have the option to enter a cost and sales price. These fields will enter the cost on purchase forms such as purchase orders and enter the sales price on sales forms such as invoices. QuickBooks will then calculate the markup and margin.
If you are selling inventory items, you can view the Reports>Sales>Sales by Item Summary Report and see the gross margin calculations for actual sales.
You can also customize sales forms to show the markup percentage. This field will automatically calculate if you change the total sales price on each line. You can customize the form to view the markup column on the screen only, but never print.
This is an important calculation for many companies and can be very useful in strategic planning.