A widely asked question in business is “How do you calculate commission?”. And that is what we are here for today. We will discuss the basics of calculating commission.
You probably heard about commission when you first looked into how businesses work, or perhaps while interrogating a salesman about their job. Consequently, you got a general idea. But now you want more details. In this regard, you landed the right space.
How Does Commission Work?
Let us first formally introduce commission.
Commission refers to the payment made to a salesperson or agent for conducting a transaction. This is usually a fixed percentage.
For example, a business may pay a salesman a percentage of the cost of goods he sells. This is in addition to the fixed portion of his salary. Commission works according to the value of the goods sold. And thus, there is a linear relationship between the two metrics.
When Are Commission-based Payments Encouraged?
Industries aiming at bringing cash into the business use commission. An example is a retail store.
How Exactly Do You Calculate Commission?
This is a simple process that can be done in a series of steps:
Before calculating your commission, determine how often you are paid
Firstly, you have to determine your commission period. This is equal to the gap between your payments.
Let’s visualize this. Suppose your company pays you monthly. Your commission period will then be one month. This means you receive a commission for the sales you assist in 30 days.
Determine Your Commission Base And Percentage
Commission base refers to what your commission relies on. Suppose your company pays a percentage of the total value of sales. Here, the value of sales will be your base. Alternatively, your company may pay a portion of the net income. In this case, the net income will form your base.
Furthermore, the commission percentage decides the amount you make. This is relative to the sales you assist. Commission percentages can vary considerably for different industries.
Use The Commission Calculating Formula
The next and final step involves a formula. This uses simple multiplication:
Commission = Commission Base * (Commission Percentage / 100)
And POOF, you get the required commission. It is as simple as that.
Additional Factors You Need To Know
Commission works in straightforward ways. But, you may encounter other situations.
For example, your company may vary commission rates after a certain goal of sales is met. In this case, you will use the same method as before. Just make sure to use the updated commission percentage.
Furthermore, your company may pay variable rates of commission for different products.
Here, you have to do extra work. Firstly, keep a check on the quantity of each product you sell. Then, find commissions separately. Note that you have to use the commission base and commission percentage for specific products. Finally, you have to add the results.
How Do You Calculate Real Estate Commission?
Real Estate Commission refers to the commission on sales relating to property. Simply, it is the amount the owner pays to the sales agent involved. This is relative to the final sales price of the property.
However, note that this calculator does not encompass rentals. These have a separate calculator.
Real Estate Commission Formula
Real Estate Agents usually receive between 4 to 7% of the final sale price exclusively. The general percentage formula can be customized for this purpose.
Real Estate Commission = (Commission Percentage / 100) * Transaction Value
To elaborate the equation;
- Commission Percentage: The agreed share of sales for the agent. This must be a percentage of the total sales.
- Transaction Value: The total money received for sales.
As an example, suppose the following scenario. The commission percentage is 6%. The sales made are worth $20,000. Now, the sales agent will receive (20,000 * 6 / 100) = $1200. The remaining $18,800 will go into the real estate owner’s pocket.
Hence, the profit earned is divided between the owner and agent. This bases on two metrics. These include the commission percentage and the value of the transaction.
In conclusion, commissions form an integral part of financial transactions. Rates do vary considerably from industry to industry. But the answer to the question “How Do You Calculate Commission” remains similar in all cases.
Simply put, calculating commission manually utilizes the basic percentage formula. This blog gives you all the guidance you need in this regard.
Alternatively, you can perform calculations on Microsoft Excel. MS Excel is an efficient software to calculate and display commissions.
Lastly, you can opt for the most convenient route. Use our very handy-dandy tool, the Commission Calculator, to perform this job for you instantly!