The gold price rises and the month looks profitable; it falls and the month looks like a loss, yet the work in your shop has not changed. The reason is that a gold shop's profit cannot be measured in money alone, because the shop works in two units at once: grams and dinars. This guide explains where your profit really comes from, how to calculate the making-charge margin and its percentage, and why a rising price can hide a real loss. A worked example is included.
The "dinars only" trap
Most shop owners calculate profit the way any trader does: the selling price minus the purchase price. That works for a clothes shop, but it misleads in gold. The price of a piece has two parts: the metal at today's price, and the making charge. And the price of the metal changes every day without you doing anything.
When you sell a gram you bought yesterday at a lower price, a difference appears that looks like profit. But tomorrow you will buy a gram to replace it at the new price. So that difference does not stay in your pocket if you want your shelf to stay as it is.
The rule: gold in equals gold out
Think of your shop as a store of grams. Every gram you sell must be replaced by a gram: you buy it from the supplier, or you settle it with them if you owe it by weight. If your weight is unchanged at the end of the month and your cash has grown, you have made a profit. If your weight has fallen, you have made a loss, even if the drawer is full of money.
That is why what comes into the shop is split into parts that must not be mixed:
- Making-charge profit: the difference between what the customer pays as making charge and what you paid the supplier as making charge. This is the profit on your work.
- Realised metal profit: it arises when you fix the price of a gold debt with the supplier above or below the market price. A real profit, but the result of timing, not of selling.
- Change in the value of the metal: the value of what is on your shelf rising or falling with the price. You see it in the balance sheet, and it moves with the price, so it does not count as profit from your work.
- Fixed-price items: a watch or a piece with a stone that you buy and sell at a single price. Its profit is the whole difference between the selling price and the purchase price.
How to calculate the making-charge profit and its percentage
Making-charge profit = (selling making charge per gram − purchase making charge per gram) × weight sold − discount
Making-charge margin = (selling making charge − purchase making charge) ÷ selling making charge
Example: you buy 21K at a making charge of 2.500 dinars per gram and sell it at a making charge of 3.000. The margin is 0.500 per gram, or about 16.7% of the making charge.
Measure the percentage against the making charge, not against the whole invoice. If you divided 0.500 by the full price of the gram (43 dinars including the making charge), the percentage would come out at 1.2%, and you would think you earn nothing. The price of the metal passes through your hands and does not stay in them.
Note too that the discount comes out of the margin alone. A discount of half a dinar per gram wipes out the whole margin in this example.
A worked example: the price rose and a profit appeared that never happened
At the start of the month a shop has 1,000 grams of 21K, fully paid for, bought at 38 dinars per gram with a making charge of 2.500. During the month the price rises to 40, and the shop sells 500 grams at 40 with a making charge of 3.000. Its expenses for rent, salaries and electricity are 600 dinars. (The figures are for illustration.)
| Item | Money-only view | Weight view |
|---|---|---|
| Sales | 500 × 43 = 21,500 | 21,500 |
| Cost | Old purchase price: 500 × 40.5 = 20,250 | Cost of replacing 500 grams today: 500 × 42.5 = 21,250 |
| Difference | 1,250 | 250 (making-charge margin) |
| Expenses | 600 | 600 |
| Result | Profit of 650 | Loss of 350 |
Both views look at the same figures. The difference between them is 1,000 dinars: 500 grams × 2 dinars, which is the effect of the price rise on the gold sold. But it is not profit from your work, because you pay the new price to put the 500 grams back on the shelf.
Now weigh it in grams: after expenses you are left with 20,900 dinars. At today's price and making charge (42.5 per gram) that buys about 491.8 grams. So your stock becomes 991.8 grams instead of 1,000. You are 8.2 grams short in a month the money view called profitable. And had you paid out the 650 as profit, the stock would be 23.5 grams short.
As for the 500 grams still on the shelf, their value has risen by another 1,000 dinars. That is real value in your balance sheet, but it follows the price and falls if the price falls. So it is a revaluation, not profit from your work.
The reverse is also true: the price falls and the month looks like a loss, while the margin is sound and the weight is unchanged. Anyone who judges by money alone may raise the making charge for no reason, or sell their gold at the worst possible time.
If your gold is a debt by weight to the supplier
Many shops take gold from the supplier by weight and pay the making charge in cash, so the gold remains a debt they owe in grams. Here, when the price rises, the value of your shelf and your debt rise together, so there is neither profit nor loss on that part. What the price affects is your net position: the gold you own minus what you owe your suppliers by weight.
When you fix the price and settle the debt in cash, the difference between the fixing price and the market price counts as a profit or loss on the metal, realised on the day of fixing. How that is recorded in your statutory books differs from country to country, so check with your accountant or the competent authority in your country.
Daily habits that protect your profit
- Close every day with a settlement that separates sales from making-charge profit and states the weights sold for each karat.
- Compare the grams sold with the grams that came back from the supplier, not just the amounts.
- Set a known limit on discounts, and do not sell the gram below its karat rate.
- Fix the price with the supplier at intervals that suit the market: every day when the price is volatile, and at longer intervals when it is stable.
- Read making-charge profit and metal profit on two separate lines, and do not spend the effect of the price as if it were profit.
How to work out the price of a piece is explained in How to calculate the gold price with the making charge, and keeping track of weight in How to manage gold inventory by weight and karat in your shop.
Questions to ask any vendor
- Is the invoice profit the making-charge margin, or does it include the price of the metal and the tax?
- Where does each piece's making-charge cost come from: the supplier's invoice, or the branch's estimate?
- Is the discount taken out of the profit, and is there a maximum discount?
- Does the daily settlement state the weights sold for each karat?
- Can I see the net gold position in grams: what I own minus what I owe my suppliers?
- Are metal profit and the change in its value shown separately from making-charge profit?
How ZMZMGold calculates profit
| Area | In ZMZMGold |
|---|---|
| Invoice profit | The making-charge margin: the selling making charge minus the purchase making-charge cost, after the line discount and the invoice discount. The value of the metal and the tax are not counted as profit. For fixed-price items: the selling price minus the purchase price. |
| Making-charge cost | Entered by the finance officer from the supplier's invoice when the purchase is valued, and allocated to the pieces by their weight. |
| Protecting the margin | Gold is not sold below the current rate for its karat per gram unless management enables this with a maximum percentage. Discounts have a maximum share of the gross sale. And a fixed-price item cannot be sold at or below its cost without management's permission. |
| Daily settlement | Prepared automatically for each branch when the day closes: retail sales by payment method, sales profit, returns margin and net profit, and the weights sold for each karat. The profit in it is visible to the finance officer and the system administrator, not to the cashier. |
| Finance dashboard | Profit for each branch, the net gold position in grams (owned minus owed to suppliers) valued at today's price, and metal profit or loss from fixing vouchers on a separate line. |
| Supplier settlement | The gold debt is settled in cash at a fixed price, or by returning gold by weight, in full or in part. The fixing difference is recorded as a realised metal profit or loss, and the printed settlement statement states the net grams sold in the period. |
| Gold position | Periodic snapshots of the net position and its value, at an interval you set, with a reminder or automatically after the daily settlement. |
| Income statement | Part of the Integrated Accounting module: the making-charge margin and realised metal profit in operating revenue, then expenses, then the change in the fair value of the metal on a separate line. The revaluation entry is shown for preview before it is posted, and only the metal is revalued in it. |
Details on the gold and jewellery shop management software page, and the accounting side in Integrated accounting software for gold shops: what it should do.
In short
A gold shop's real profit is the making-charge margin after discounts and expenses. Movements in the price change the value of what you own, and should be read on a line of their own. Count in grams before dinars: if your weight holds and your cash grows, you are making a profit; if your weight falls, do not believe any figure that says otherwise.