Gross Margin
Definition
Gross Margin is a measure of the amount earned by a company from selling its products. Gross Margin is calculated by subtracting the cost of goods sold from sales revenue, and then dividing that difference by sales revenue. The result is expressed as a percentage.
How is Gross Margin calculated?
The formula for calculating Gross Margin is:Gross margin = (Revenue - COGS) ÷ Revenue
Example:
Your business makes $25,000 in revenue and the cost of goods sold to produce the product was $15,000. This gives you a return of $10,000. Your gross margin is $10,000 ÷ $25,000 which as a percentage is 40%.
What does gross margin measure?
Gross Margin measures the profitability of a company's operations. If a company's gross margin is high, it means that the company has been able to sell its products for more than what it costs to produce them. If a company's gross margin is low, it means that there is not enough profit to cover all of its expenses, which could lead to financial trouble down the road if left unchecked.
What is the importance of gross margin?
The importance of Gross Margin lies in its ability to help you understand how much profit your business makes on each sale, as well as how profitable certain products are compared to others within your industry or market space (if applicable). This information can be used to determine where additional investment should be allocated—for example, if one product line isn't performing well compared with others within your brand portfolio then perhaps some changes need to be made before investing more time and money into those products.
