Business Math (also known as Commercial Math)
Including Percentages, Decimals, Commissions, Margin, Markups,
Discounts, Interest, Credit Cards, Sales Tax
Purpose of this discussion:
The purpose of this meeting is to introduce/teach/reinforce certain key concepts in business that involve mathematical concepts that you may or may not have been exposed to previously. These concepts will be discussed with the goal of making sure all Advantus staff has a similar understanding of them, and so we can all understand the critical terms we use every day. In addition, we will discuss how Advantus utilizes these mathematical concepts within the company. Our goal is for everyone to improve their business math skills, not to judge what you know previously. If any of the concepts discussed are still unclear after the meeting, please approach your manager for more assistance. If there is a lack of clarity for your manager, they can feel free to email Charlie Frohman at cfrohman@advantus.com, and he will work to clear up the ambiguity and adjust this presentation to make it clearer and more useful. If there are mathematical concepts that are not covered here that you think should be covered, advise your manager, and they can then suggest them to Charlie to be incorporated into future versions of this. You don’t have to love math to succeed with math.
Percentages:
Percentages are numbers that express parts of a whole. For example, we all know that 50% of something is ½ of that thing. But where does this come from? To find out, you must assume that a whole is 100%. Then you take the 50 and divide it by the 100, 50/100, which equals ½. You must know how to increase something by a certain percentage or decrease something by a percentage. So if someone said to you, the price of an item is usually $150, but today there is a 30% off sale. To take off 30%, you would multiply 150 by 30 %( or .30), and that gives you a result of $45. That’s the savings or sale amount. You then take that $45 off of the $150 and end up with $105, which is the after-sale price. In reverse, if we said we wanted to raise the price of an item by 20% and its current price is $175, you would multiply by 20% (.20) and add the result, which is $35 to the $175 and get $210.
Decimals:
Decimals are the numerical equivalents of percentages, but you lose the “%” sign by moving the decimal point two places to the left. So 44% is .44. 92% is .92. 120% is 1.20.
Commissions:
Commissions are payments we make typically to outside sales organizations for selling our products. They are usually expressed as a percentage of the selling price to the customer. Accounting and sales work together to set up the reports necessary to create the payments for these commissions. For example, if we set up to pay a certain rep group 2% on sales they make to X customer. If they sell that customer $25,000 worth of product, they will get paid 2% x $25,000 or
$500.
Markup and Margin:
Markup is a term used in retailing mostly (we are not a retailer) that describes how much is added to the cost of an item to determine its selling price. Markup is usually expressed as a percentage on top of a cost. So if someone said that item costs us $80 and we want to have a 30% markup, you would add 30% to the cost of the item by multiplying $80 by .30 and then taking the resulting $24 and adding it to the $80 for a new cost of $104. That is an $80 cost “Marked Up” by 30%.
We don’t use Markup at Advantus because we are a manufacturer, and Margin is the math concept we use. Margin is always a smaller number than Markup when looking at the same cost, profit, and selling price because the selling price is always a larger number than cost, and having a larger denominator in a fraction creates a smaller result. In the example above, to find the Margin, you would take the $24 profit and divide it by the $104 selling price, and that would be the Margin, which is the number we use at Advantus. In this example, the Margin would be 23%. If you were asked to determine the selling price of an $80 item to generate a 23% Margin, you would divide the $80 by 100% minus the Margin required. So in this example, you would divide $80 by (100%- 23%). The match would look like $80/.77, and that would yield you $104. Margin can never be higher than 100%. Markup can be any percentage.
MARKUP PERCENTAGE is determined by taking the PROFIT and dividing it by the COST (Profit/Cost)—we don’t use this at Advantus. It is included here because many of our customers do use Markup.
MARGIN PERCENTAGE is determined by taking the PROFIT and dividing it by the SELLING PRICE (Profit/Selling Price). Profit is determined by taking the Selling Price and subtracting all the costs of the item, including product cost, duty, and other costs associated with the item. MARGIN is what we use at Advantus!!
Discounts:
Often our customers buy items from us based on a discount structure that allows them to make a profit when they resell it. So if we say “that customer gets 50% off the list price,”. That means that this particular reseller will be paying us ½ of the list price (aka retail price). Some customers, usually wholesalers who resell to dealers, get even greater discounts than 50%. You may hear that the customer gets “50/20 off list price”. That doesn’t mean they get a 70% discount. It means you first take off 50% off the retail price. Then you take an additional 20% off the result of the first discount. You will find that a 50/20 discount is equivalent to 60% off of the list price.
Interest:
Interest is the amount of money someone charges you for borrowing money. It is usually expressed as an annual rate. For example, if you are offered an $800 loan with an annual percentage rate of interest that is 6%, you will have to pay $48 per year in interest ($800 x .06). If you put money in the bank, you would earn the rate they offer you in the same manner. An interesting fact in math is the Rule of 72. The Rule of 72 says that if you take the number 72 and divide it by the interest rate in percentage terms, you will find out how long it takes to double the original amount. So if you have an interest rate of 9% and you divide 72 by 9, you find out that if you earn 9%, you will double your money in 8 years (72/9). Don’t ask why this works; it just does. Feel free to investigate this on your own. So if you have credit card debt, think about that. If you are paying 18% interest on your credit card, it means that your $1000 TV set costs you $2000 if you take four years to pay (72/18). Banks are in business to make money; it never makes sense to let them make money by borrowing at their incredibly high-interest rates if you can avoid it. Nothing gets more affordable when you borrow money at high-interest rates to buy it. Einstein—who invented the atomic bomb and all the physics to make it work—was asked, “what the most powerful force in the universe is,” he answered, “Compound Interest.” Compound interest is what happens when you deposit money and earn interest, and then your interest earns interest. When the interest is paid not only on your original money but on your interest as well, it is called compounding, and that creates Compound Interest. So remember, when you only pay a credit card’s minimum amount due, you are allowing the interest to compound, and that’s when the Rule of 72 works to hurt you. Remember, if you are paying 18% interest, you pay for your items twice every four years you have a credit card balance.
Sales Tax:
Sales tax is a tax that state and local governments charge you on certain items you buy. It is typically not charged on the food you buy at the supermarket. If you buy a hamburger at McDonald’s, you pay sales tax; if you buy meat and make it yourself, you don’t pay sales tax. Sales tax adds a tremendous amount to the cost of the goods you buy. Sales tax is not charged on items that are sold for resale. The sales tax is only charged to the end-user—the consumer. So, for example, if we sell a Floating Luxuries Pool Float to Frontgate, we don’t charge the reseller, Frontgate, any sales tax, they utilize a Resale Certificate to avoid the tax, they, however, do have to charge the tax to their customers.
After going over any of the above, if it is unclear, or you want more examples, talk to your manager, and if they have an interest they can ask Charlie Frohman cfrohman@advantus.com to give more training/examples, etc.
THE PURPOSE OF THIS TRAINING IS NOT TO SEE HOW MUCH YOU DON’T KNOW; IT IS TO ENHANCE YOUR KNOWLEDGE BASE SO THAT YOU CAN SUCCEED AND ACHIEVE MORE FOR YOURSELF AND ADVANTUS.