Imports: the invoice price is not your cost

“I checked the markup thirty times and the cost not once. I thought it was written in the invoice”

Oleh Tkachuk has been bringing tools into Lutsk for eight years and selling them across the western regions. His customers are builders' merchants, a few repair shops and work crews. The range falls into three groups: power tools, hand tools and consumables.

The business looked transparent. There is a supplier price, there is a markup, there is a shelf price. For all eight years Oleh worked to exactly that scheme.

Late last autumn his accountant showed him a breakdown by group. On consumables he was earning noticeably less than he believed. The worst of it was that the mistake repeated with every shipment.

What the invoice shows

The supplier invoice is the most convenient document in the whole operation. It arrives first, it is in euro, and it already carries a price per unit.

So that is what the markup gets built on. Almost every importer starts this way, and for the first years it works.

The trouble is that the invoice describes goods in the supplier's warehouse. They have not reached your shelf yet.

Between those two points sit freight, customs duty, the broker and time. Each of them has a price, and none of them is the same across the whole range.

The invoice is the price in someone else's country. Landed cost is the price in your warehouse.

While the range is uniform, the gap between those two figures is steady. You can hold it in your head as one percentage.

As soon as the price list carries groups with different physics, that percentage stops being one. This is what happened to Oleh in his third year.

He added consumables then, to keep customers on a full range. The decision was right for sales and invisible to the books. The markup stayed the same as on drills.

What actually lands in stock

Oleh wrote out everything that happens to the goods from the factory to the warehouse in Lutsk.

• The invoice price, converted at the rate on the payment date
• Sea and road freight to the warehouse
• Customs duty — 10% of the customs value
• The customs broker's fee and clearance

Value added tax is not on this list. It is recoverable, so it does not go into landed cost. You feel it in the cash box; in the cost you do not.

The rate at the time of the shipment was 46.50 ₴ to the euro. Oleh took exactly that one, because he paid the supplier before dispatch. The rate on the sale date changes nothing — the money left earlier.

This is an important accounting detail. Landed cost is fixed at the moment of payment, not at the moment of sale.

Importers often revalue stock at the current rate. The figure comes out handsome and has nothing to do with the money that left the cash box.

Oleh avoided this mistake by accident. His accountant always recorded the payment rate, because it made reconciling with the bank simpler.

Bookkeeping convenience saved the accuracy of the calculation. That happens rarely, and it is not worth relying on.

Three product groups

The groups differ not only in price but in physics. It is the physics that creates the difference in landed cost Oleh never thought about.

Power tools are expensive and compact — a boxed drill weighs little and costs a lot. Hand tools are cheap and bulky. Consumables are small, cheap and come in large batches.

The shipment held 500 power tools, 4 000 hand tools and 10 000 consumables. In money that is 5 487 000 ₴ on the invoice.

“I treated consumables as the most profitable line. They carry the biggest markup percentage and they turn over fastest”

Both statements were true. The conclusion drawn from them was wrong.

Fast turnover and a big markup over the invoice do not mean a big margin. They mean only that the money moves often.

Quantity and price move in opposite directions

Power tools: 500 units at 92 €. Consumables: 10 000 units at 4 €.

In invoice money the groups are comparable. In cubic metres they are not.

Power tools take the least space in the container of the three groups. Hand tools take the most.

That gap is what decides how the freight falls. A container is sold by volume, not by the value of its contents.

The carrier does not ask what is inside the box. He asks how many boxes and what size.

That makes freight predictable for planning and unfair to the cheap groups.

Freight is charged by volume

The carrier charges for space in the container, not for the value of the goods. He does not care what is inside — drills or drill bits.

So freight falls far harder on cheap and bulky lines than on expensive and compact ones. The allocation logic is simple; the consequences are not.

Per unit it came out like this: 22 ₴ on power tools, 28 ₴ on hand tools and 14 ₴ on consumables.

For a power tool at 4 278 ₴, twenty-two hryvnia is small change. For a consumable at 186 ₴, fourteen hryvnia is a noticeable share.

In percentage terms that is half a percent against seven and a half. A fifteenfold difference on the same shipment.

Oleh did not see this for eight years, because freight arrived as one bill for the whole container. It never reached the stock cards at all.

The bill went into period costs, not into the cost of the goods. Formally that is allowed; in practice it is what creates the blind spot. The spend is visible as a total and invisible by group.

Freight is indifferent to the value of the goods. It counts cubic metres.

Duty is charged by value

Customs duty works the other way round. It is taken as a percentage of the customs value, that is the invoice together with the freight.

The rate is the same for all three groups: 10%. The difference comes not from the rate but from the base it is applied to.

In hryvnia per unit that is 430 ₴ on power tools, 40 ₴ on hand tools and 20 ₴ on consumables.

Here everything is reversed. The expensive pays more, the cheap pays less.

Two forces pull in opposite directions and still do not balance each other out. The result comes out different all the same.

Two cost lines are calculated on different principles and land on the groups differently. Freight presses on the cheap, duty on the expensive. That is why a single uplift does not exist.

430 ₴ of duty, 4 278 ₴ of invoice

The figures start alike, but one is ten times smaller than the other. In conversation they get mixed up constantly.

Landed cost by group

Oleh added up all four lines and got the landed cost. He now refreshes this table every time the broker's bill arrives.

Across the whole shipment the invoice came to 5 487 000 ₴. Freight added 263 000 ₴, duty 575 000 ₴, the broker 31 000 ₴.

Freight and the broker look modest against the invoice. Duty adds the most of the three lines.

But broken down by group the picture changes. For consumables freight weighs more than duty; for power tools it is the reverse.

That is why the totals alone are not enough. They are true and they explain nothing about which group earns what.

Together the goods landed in stock at 6 356 000 ₴. That is 869 000 ₴ more than the invoice sum Oleh had built his markup on for eight years. Over a year the difference comes to 3 476 000 ₴.

The uplift differs by group

Now the main point. The uplift over the invoice came out different for every group, and the gap between them turned out larger than any supplier discount.

Power tools grew dearer by 10.7%. Hand tools by 18.8%. Consumables by 19.4%.

Oleh saw these percentages for the first time. Until then logistics had lived in his head as one figure — about ten percent.

Ten percent was true for exactly one group out of three. For the other two the error was almost twofold, and those two groups supplied most of the units in the shipment.

Nearly a twofold gap. And it depends neither on the supplier nor on the negotiation.

“I was haggling over two percent of discount in the invoice. And nine percent of difference was sitting in the container”

It depends on how much the goods weigh and take up relative to their own price. You cannot change that — it is a property of the goods, not of the contract.

“I thought logistics was a percentage of the purchase. It turned out to be a percentage of the volume”

Cheap goods cost more to carry. Not in hryvnia, in percent.

This rule holds in any import business. Building materials, tableware, household chemicals — anywhere a price list carries the expensive and the cheap together.

The wider the price spread inside the range, the more a single markup gets wrong.

Oleh's spread was twenty-three-fold: from 4 € to 92 € a unit. With a spread like that, one markup cannot be right.

The naive markup

For eight years Oleh set a markup of 50% over the invoice. The rule was the same for every group and convenient for the sales team.

In his head that meant a margin of about a third of revenue. He planned his costs and looked at growth out of that third.

The arithmetic is simple: a markup of 50% on cost gives 33.3% margin in the price. That is how retail counts.

The formula is correct and widely known. The problem is not in the formula.

But the markup sat on the invoice, not on the cost. Between those two bases Oleh had anywhere from ten to nineteen percent.

Markup and margin are not the same number

Markup is counted from cost. Margin is counted from the selling price.

They are easy to confuse, and the error always favours the seller in his head and hurts him in the cash box.

A markup of 50% sounds like half. The margin comes out a third, and only if the base is right.

What the real margin shows

Not one group reached a third. Power tools came closest at 26.2%, and precisely because their logistics is the lightest.

Consumables, which Oleh held to be the most profitable, gave 20.4%. High turnover created a feeling of profit they did not have.

The gap between belief and fact is almost thirteen percentage points.

“The galling part is that the error was stable. Eight years running, in the same direction”

A stable error is more dangerous than a random one. It produces no surprises and so draws no attention.

The business worked all the while and brought in money. Just less than it could, and not where it seemed to.

That is what makes such errors long-lived. They do not break a business, they only wear it down over years.

50% markup is not 50% margin

A markup of 50% gives a third of margin at best. For Oleh it gave a fifth.

Two percentages that sound the same mean entirely different money.

The markup actually needed

Oleh turned the question round. What markup over the invoice gives a real 33.3% margin in the price?

The answer turned out different for each group.

The calculation is simple: the required price equals the landed cost divided by two thirds. After that you only compare it with the invoice.

• Power tools — 66.1%
• Hand tools — 78.2%
• Consumables — 79.0%

None of these figures equals 50%. And no two of them equal each other — even hand tools and consumables diverge.

One markup for the whole price list is a decision taken without a calculation.

A single markup is convenient exactly while the range is uniform. After that it becomes a way of not thinking.

Oleh did not switch to three different markups mechanically. He left prices at market level, but he now knows every group's margin to the penny.

The year in numbers

Oleh brings in four shipments a year. His actual shelf prices are higher than the naive calculation — the market allowed more.

Power tools sell at 6 200 ₴, hand tools at 620 ₴, consumables at 360 ₴.

The margin in hryvnia comes to 1 464 ₴, 178 ₴ and 138 ₴ respectively. Gross profit on a shipment is 2 824 000 ₴.

Fixed costs are the warehouse, the wages and delivery across Ukraine. Net profit works out at 7.9% of revenue.

Four shipments a year is the rhythm the warehouse lives by. Between them the working capital sits in goods.

Every shipment is over six million hryvnia leaving the cash box at once. It comes back over the following quarter, and that is exactly why payment terms hurt so much.

Seven point nine is normal

For tool distribution that is an ordinary result. The problem is not its size but that owners arrive at it blind.

First move: count the landed cost

Oleh's first decision was technical and took one evening.

He added a fourth row to every group's stock card — the landed cost, not the invoice price.

The card now holds four figures instead of one:

• The invoice price at the rate on the payment date
• Freight per unit — by volume, not by value
• Customs duty — 10% of the customs value
• Broker and clearance per unit

The calculation is done once per shipment, when the last bill arrives — the broker's. Until that moment the cost is incomplete.

The work takes half an hour for the whole batch. After that the figure lives in the card until the next container.

“Four figures instead of one. For eight years I looked at the first and believed I saw everything”

The hard part was not the counting but admitting that the earlier calculations had been incomplete. The figures appeared in an evening; the habit changed more slowly.

Second move: markup by group

The second decision concerned the price list and came harder than the first.

The single markup of 50% went. Every group got its own, counted from its own cost.

Shelf prices barely moved — they were already above the naive calculation. What changed was the ground on which they are approved.

The main change was elsewhere. Oleh stopped giving discounts at random.

A discount comes out of margin, not out of price

Ten percent of discount on consumables eats half the margin in that group.

You see that only when the discount is counted against the landed cost. Against the invoice price it looks painless.

The sales team handed out such discounts weekly. They did no harm while nobody counted what exactly they were subtracted from.

Now every salesperson has a discount floor by group in the price list. Below it, Oleh's approval is needed.

The same ten percent on power tools leaves the larger part standing. These two decisions cannot be taken the same way.

Third move: payment terms

The biggest customer asked for payment terms of 30 days instead of prepayment. The argument was the usual one: every competitor works that way.

Before, Oleh would have answered at once — either “yes” out of fear of losing the customer, or “no” out of caution. This time he counted.

A month of turnover on annual revenue of 36 720 000 ₴ is 3 060 000 ₴.

The figure is simple, but Oleh had never worked it out. He had always judged payment terms as a question of trust, not of money.

That is how much would freeze in receivables if the whole turnover moved onto terms. This money does not vanish, but it does not work either.

Annual net profit, meanwhile, comes to 2 896 000 ₴.

The two figures stood side by side for the first time. One is what the business earns in a year. The other is what would have to be frozen.

After that the conversation with the customer changed. Instead of “yes” or “no” came a question about a share of turnover and a term.

“The terms would have cost more than I earn in a year. I did not refuse — I worked out how much I can give”

Payment terms are not a concession in negotiation. They are a loan you issue out of your own working capital.

A gap of 164 000 ₴

The frozen sum exceeds the annual profit by 164 000 ₴.

Oleh gave terms to one customer on part of the turnover. The decision stayed his, but now it has a price in hryvnia.

What to do on Monday

Oleh boiled it all down to three actions.

• Count the landed cost for each group, not for the shipment as a whole
• Check what uplift over the invoice logistics adds in every group
• Before every discount and every payment term, ask what it costs in hryvnia

Not one of these actions needs a new system, a new supplier or a change of range.

All three change what the owner brings into a negotiation.

The first two are done once per shipment. The third every time a customer asks for a concession.

Oleh puts it briefly himself: he did not become tougher in negotiation, he became more specific.

A price you have not counted has always been counted by someone else.

Money does not vanish — you just do not see it

Almost nothing changed in Oleh's business. The same supplier, the same container, the same customers and the same shelf.

One figure in the stock card changed. Instead of the invoice price it now holds the landed cost.

Through that figure, discounts, payment terms and every next shipment look different.

The range stayed the same. What changed are the rules by which it is priced.

Oleh did not start bringing in fewer consumables. He stopped counting them as the most profitable group.

Consumables hold the customer and close the range. That is their job, and it has value too — just not the value Oleh had assigned to it.

Goods grow dearer on the road. The bill for the road arrives in silence.

How to see this in your own imports

Everything above rests on one row: not the shipment as a single figure, but each group on its own — with freight by volume, duty by value and the cost it lands on your shelf at. As long as the markup sits on the invoice price, you see neither that logistics adds between 10.7% and 19.4%, nor that a month of payment terms freezes 3 060 000 ₴. When the same data is collected automatically, what each group really earns becomes visible — which is exactly why owners of small and medium businesses use Finmap: to see the financial picture rather than guess at it.

Read also

• Wholesale on credit terms: profit on paper, no cash
• Building-Materials Store: Thin Margins, Supplier Terms, Frozen Stock

Topic foundation: Management Accounting Explained: What It Is and Why Owners Need It