Calculating Gross Profit in the Promotional Products Industry

Understanding what profit you are making is a critical part of running any promotional products distributor. PromoServe has been developed to make this task easy and ensure you can identify potential issues before money is lost and ensure you make the maximum possible profits. There are 2 basic types of orders and each calculates gross profit differently

Back to Back / Special Order

The most common type of order for the typical distributor who hold no stock and orders products when their clients order from them Gross Profit is calculated by Sales Invoice Purchase Invoice(s) = Gross Profit The typical issues to be aware of are

  • Profit not confirmed until purchase invoice received, so you must make an accrual for any orders invoiced where you have no received the Purchase Invoice
  • Differences between Purchase Order & Purchase Invoice: if any occur would you recharge?
  • Any additional costs incurred against the order not on the original purchase order, such as carriage

The recommended reports to use are

a)Invoice Profitability Reporting: auto calculates your accrual & work in progress

b)Job Profitability Reporting: helps manage to spot potential issues

c)Sales Analysis: must use "From Order™" costing and auto update purchase orders

In Stock / Corporate Program

This is where goods are purchase and kept in stock so the gross profit is calculated when the goods are despatched. PromoServe enables 4 different methods of calculating gross profit

  • FIFO / Actual margin calculated on a first in first out basis (for higher value products can also work on specific serial numbers)
  • Standard allows you to manually set a standard cost price for a product
  • Weighted Average calculates based on cost each time you purchase divided by number of units purchased

"Latest" always uses the last cost price you paid for the product. You can select the costing method you want to use as a default in system set up and even change on a report by report basis if required. It is recommended that these options are discussed with your financial team / accountant. The recommended reports to use are

a)Sales Analysis: must use "Actual Cost™"

b)Invoice Reporting: design your own layout

Measuring your Gross Margin for both order types combined

As profit is calculated in totally different ways for each order type it is quite complex to have a single report that gives you a 100% accurate figure for your gross profit. However PromoServe can accommodate this requirement in the following ways

a) Sales Analysis: Costing Type From Order Invoices Only. This report gives you an accurate summary of your profitability for both methods, but you should consider Stock Orders all costed by default costing type (Actual, Average etc). Potential Issue exists if generic codes are used for specials. Purchase Orders must update costs on sales orders (system setting). Profitability on Back to Back Order can only be expected until Purchase Invoice received. Does not take into consideration any additional costs added on a separate purchase order

b) Invoice Profitability by Order Type plus Invoice Reporting. This is the most accurate reporting combination but needs 2 reports run. Invoice Profitability considers all additional costs, informs whether purchase invoice received and auto calculates your accruals. Invoice Reporting Calculates the Cost of Sales for Stock Products (data could be combined into Invoice Profitability Reporting).

Nominal Reporting (Profit & Loss Account)

To ensure your nominal reporting is accurate you should take the following steps.

a)Back to Back Orders Only: make a posting for Purchase Invoice Accruals and Work in Progress (where you have received the Purchase Invoice and not raised the Sales Invoice) at the end of each month on an agreed cut off date

b)Stock Orders Only: make a Stock Valuation Posting each month c)Take both steps recommended in a) and b)