Profitability
Gross margin
Gross margin is the share of revenue left after paying the direct costs of delivering what you sold.
Gross margin = (Revenue − Cost of goods sold) ÷ Revenue
Worked example
| Revenue | $1,530,000 |
| Cost of goods sold | $591,000 |
| Gross profit | $939,000 |
$939,000 ÷ $1,530,000 = 61.4%
Why it matters
Gross margin pays for everything else: salaries, rent, marketing and profit. A drop of a point or two, on labour or materials, can erase a quarter’s profit without revenue changing at all.
Common mistakes
Where it misleads
Classifying direct labour as an operating expense, which flatters gross margin.
Comparing gross margin across companies that put different costs above the line.
Watching the percentage without the dollars: margin can rise while gross profit falls.
Related terms
Keep reading
- Contribution marginContribution margin is what each sale leaves over after every cost that rises with that sale, available to cover fixed costs and profit.
- EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization: a measure of operating profit before financing, tax and non-cash charges.
- Budget vs actualBudget vs actual compares what happened in a period with what was planned, line by line, to show where the business is ahead of or behind its plan.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.