The are several different sales percentages your business may need to calculate. Knowing the formula for those equations is key.
- A sales percentage is a rate (or fraction of a number) multiplied by a base amount.
- Sales percentages relevant to business owners include discounts, sales taxes, profit margins, overhead cost ratios and production cost ratios.
- You can calculate a percentage increase or decrease by dividing the change in value by the initial value.
- This article is for business owners who want to know how to calculate sales percentages.
Although calculators and point-of-sale (POS) systems take care of most important day-to-day business calculations, you won't always have them on hand. In these cases, you should know how to quickly make some key calculations. Some of those calculations involve determining a sales percentage. For these calculations, all you need are some basic math skills and a handful of easy formulas.
Basic formula: How to calculate a sales percentage
To calculate a sales percentage, you need two main data points: the sales rate and the base cost. The basic formula for how to calculate a sales percentage is:
Sales percentage = Rate x Base
This formula is important for applying discounts and calculating the sales tax you'll pay on certain purchases or collecting on your customers' purchases. It's also important when you must make rapid business decisions and don't have a calculator or POS system handy.
This situation could arise if you're buying wholesale at a trade show or a customer asks you for a deal. Below, we'll run through several scenarios in which sales percentages apply and show you how to calculate the sales percentage for each. [Read related article: Best Accounting Software for 2021]
Key takeaway: The sales percentage is the rate multiplied by the base amount, and it's important in many business decisions and transactions.
Common business sales percentage calculations and examples
Among the most common types of business sales percentage calculations and examples are:
Let's say you own a grocery store. You're currently offering a 20% sale on bread to shoppers who belong to your loyalty program. If each bread loaf usually costs $2.00, then the discount you give your loyalty customers is:
0.20 x $2.00 = $0.40
This discount amount means that you will sell the item for $2.00 - $0.40 = $1.60.
Note that in the above calculation, 0.20 was used in place of 20%. When calculating sales percentages, it's often easier to replace a percentage with its decimal equivalent. Doing so is simple: Just drop the percent sign and divide the remaining number by 100.
2. Sales tax
Suppose you own a bookstore, and a customer comes to the counter with a $15.00 book and a $12.00 book. Since books are not exempt from sales tax, you must collect sales tax from the customer (which you must to the government). If your jurisdiction's sales tax is 8%, then the sales tax your customer will pay is:
0.08 x ($15.00 + $12.00) = $2.16
This means that your customer's total is not $27.00, but $27.00 + $2.16 = $29.16.
3. Profit margins
In some instances, you will calculate certain business metrics using a modified version of the sales percentage formula. In this formula, either the rate or the base will be alone on the left-hand side of the equation. Profit margin is an example:
Profit margin = Gross profit / Revenue
In this formula, gross profit is the sales percentage, the profit margin is the rate and revenue is the base. As such, the above equation follows the pattern of (rate = sales percentage / base), which is equivalent to the basic sales percentage formula.
To show why profit margin is useful to calculate, let's say that the $15.00 book you sold in the above example costs $12.00 to acquire and stock. As such, the gross profit you obtain from each book is $3.00 ($15.00 - $12.00). In that case, your profit margin is:
$3.00 / $15.00 = 0.20 = 20%
This profit margin means that your bookstore keeps 20% of the money it earns from selling the book.
4. Overhead as a percentage of sales
Your company's overhead as a percentage of sales is the ratio of your indirect costs (rent, utilities, interest, etc.) to your sales. For example, if your company makes $500,000 during a period and spends $50,000 on overhead, your overhead as a percentage of sales is:
$50,000 / $500,000 = 0.10 = 10%
In other words, $1 of every $10 your company earns goes toward overhead costs.
5. Production costs as a percentage of sales
Your company's production costs as a percentage of sales is the ratio of your production costs to your sales. For example, if you sell insect traps for $5.00 each but spend $1.25 on the labor required to produce each trap and another $1.00 on the materials needed for production, your cost of production as a percentage of sales is:
($1.25 + $1.00) / $5.00 = 0.45 = 45%
In other words, 45 cents of every dollar you earn selling your insect traps goes toward producing the traps.
Tip: Common business sales percentages include discounts, sales tax, profit margins, and overhead and production costs as a percentage of sales.
How to calculate a percentage increase or decrease
Sometimes, instead of calculating a sales percentage, you'll want to calculate a change in percentages from one period to another. The formula to do that is:
Percentage change = Difference between two numbers / Previous period's number
You're most likely to be interested in percentage changes for profit margins and overhead and production sales percentages instead of sales and discounts. Below is an example for each:
- If your profit margin increases from 30% to 40% in a period, the percentage increase is (40% – 30%) / 30% = 0.3333 = 33.3%.
- If your overhead costs decrease from $50,000 to $45,000 in a period, the percentage decrease is ($50,000 – $45,000) / $50,000 = 0.10 = 10%.
- If your production costs increase from $15,000 to $18,000 in a period, the percentage increase is ($18,000 – $15,000) / $15,000 = 0.20 = 20%.
The last example shows that not all percentage increases are good and not all percentage decreases are bad. An increase in production costs harms your bottom line; when calculating percentages, you shouldn't only know their value – you should know their ramifications for your business, too.