How to calculate your real profit margin (not the one you think you have)
Real profit margin is net profit divided by revenue, where net profit is revenue minus cost of goods sold minus every operating expense in the same period - marketplace commission, shipping, returns, ads, rent and salaries. Gross margin, which most sellers quote, stops at cost of goods and overstates what you keep.
Two numbers, one of them misleading
Gross margin is (revenue − cost of goods sold) ÷ revenue. Net margin is (revenue − cost of goods sold − operating expenses) ÷ revenue. A product with 40% gross margin routinely lands under 10% net once fees, shipping, returns and ads come out of it. Both numbers are useful; quoting the first as though it were the second is how a busy month turns into a bad month.
What belongs in the calculation
Everything that had to happen for the sale to occur, recorded against the period the sale happened in. Timing is where most manual attempts fall apart: a stock purchase in March paying for sales in May makes March look terrible and May look excellent.
- Cost price of the goods sold - not the value of stock purchased
- Marketplace commission, closing fees and collection fees
- Shipping paid, both ways on returns
- Return and RTO losses, including goods that come back unsellable
- Payment gateway charges
- Advertising spend, per channel where you can attribute it
- Rent, salaries and the rest of the fixed base
Do it per product, not just per month
A monthly total tells you whether the business made money. It does not tell you which product made it. Ranking products by profit rather than by revenue is usually the moment something uncomfortable shows up: the bestseller near the top of the sales list sitting near the bottom of the profit list.
The fast seller with a thin margin
High volume hides a small per-unit loss well. It shows up in the sales report as success and in the bank balance as nothing.
The slow seller that carries the shop
Low volume, high margin, no discounting, no returns. It is invisible in a revenue ranking and it is often what funds everything else.
Then do it per channel
The same product does not earn the same on every channel. Marketplace commission, shipping economics and return rates differ enough that a product can be profitable at the counter and loss-making on a marketplace at the same price. Until online and offline sales sit in one ledger with cost price attached, that comparison cannot be made at all.
Doing it without a spreadsheet
filarity holds a cost price on every product, so each sale records margin rather than revenue. Purchases, supplier bills and expenses land in the same period as the sales. The dashboard ranks products by revenue and, separately, by profit, and compares margin across channels - which is the ranking that changes what you order next.