Reading your shop's gross margin from the books
How a shop reads gross margin from its own income statement, and the three things in Achekam today that can make the cost of sales figure wrong.
By Achekam · · 4 min read · For Retail businesses in South Africa, Nigeria, Kenya
Gross margin is the number a shopkeeper should know better than any other. It tells you what is left from each rand, naira or shilling of sales after paying for the goods you sold, before rent, wages and electricity. If it falls, every other cost becomes harder to carry. If it is wrong, every decision based on it is wrong too.
Achekam gives a shop that sells through its till a gross margin straight from the books, because every till sale records both the sale and the cost of what was sold. But the cost side depends on figures that people type in and keep up to date, and today some of them cannot be updated at all. This article shows how to read the margin, and the three things that most often make it look better than it really is.
Revenue and cost of sales posted with every till sale
Every till sale that reaches the server posts a balanced journal in the same step. Alongside the payment and the output VAT, the journal credits revenue with the price before VAT and debits cost of sales, crediting inventory, at the product's cost price.
So by the end of any day, your ledger already holds:
- Revenue (account 4000), the sales value before VAT;
- Cost of sales (5000 or 5100), what those goods cost at the cost prices on the products;
- Inventory (1300), reduced by the same cost.
Revenue less cost of sales is your gross profit. Divided by revenue, it is your gross margin. Investopedia's explainer on cost of goods sold covers what belongs in that cost and the methods businesses use to work it out, which is useful background for the limits that follow.
The single cost price behind each line
The cost of sales on each till sale comes from one place: the cost price typed on the product in the Item Master, where each product is created with a SKU, a name, a category, selling and cost prices, an opening quantity and a VAT treatment.
Achekam uses that single cost price for every sale of the product. There is no FIFO and no weighted-average costing. If you bought a line at one price in January and a higher one in March, every sale is still costed at whatever figure sits on the product.
For a shop with stable supplier prices, that is close enough. For a shop whose costs move often, it is the first place the margin goes wrong.
Cost prices that go stale when suppliers raise theirs
Today there is no screen that lets a business change a product's price, cost or VAT treatment after creating it, or deactivate it. So when a supplier raises prices, the cost on the product stays at the old figure, and every sale afterwards is costed too low.
The effect on the income statement is quiet but real: cost of sales is understated, gross margin looks healthier than it is, and the inventory account carries a value that does not match what the goods cost to replace.
Until product editing arrives, manage it outside the till:
- Keep a list of products whose supplier cost has changed since they were created, with old and new cost.
- At month end, estimate how much the month's cost of sales is understated for those lines.
- Ask your accountant to post an adjusting journal, and to keep the working.
Stock losses that never reach cost of sales on their own
The second gap is shrinkage. Stock counts, wastage, transfers and opening quantities do not post to the general ledger; only till sales and till returns move the inventory account.
When goods are stolen, broken or expire, the quantity can be corrected by a count, but the value stays in inventory. Cost of sales never sees the loss, so the margin looks better than it is, and inventory on the balance sheet holds goods that are no longer there. Writing those losses out of the books takes a separate journal; how to do it is in writing off damaged, expired and missing stock.
Reading the income statement against the previous period
Management accounts show an income statement for a period you choose beside the period before, and a balance sheet at period end. Both are added up from your own journals and export as PDF or CSV. The year-to-date preset starts on 1 January rather than your own year start, so set the dates yourself if your year runs differently.
Read margin month against month, not as a single figure. A margin that is steady month after month and then jumps may point to a stale cost price or an unposted write-off just as easily as to better buying, so check before you celebrate. A margin that drifts down slowly is worth investigating line by line. For a broader approach to reading monthly figures, see management accounts for partners.
Questions to ask when the margin moves
| What moved | Questions to ask |
|---|---|
| Margin rose with no change in prices | Have supplier costs risen while product costs stayed old? Has a count found losses that were not written off? |
| Margin fell | Have you discounted more at the till? Has the sales mix shifted to lower-margin lines? Has a write-off journal been posted this month? |
| Margin swings month to month | Are write-offs posted in some months and not others? Are adjusting journals consistent? |
| Inventory value keeps growing while sales are flat | Are losses staying in inventory? Are stale costs overstating it? |
Pull last month's income statement, work out the gross margin, and ask the questions in that table before you rely on it. The journal behind each sale is explained line by line in what a till sale posts to your books.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
