How to Figure Negative Gross Margins

Your company's gross margin is an important number to know before planning your company's future.

Knowing your company's gross margin will give you a clear picture of what percentage of each dollar your company generates is retained as profit. If the gross margin is negative, the business spending more than it's making. The formula for gross margin is revenue minus cost of goods sold (gross profit) divided by sales. This formula is the same no matter if the result is a negative or positive gross margin.

Instructions

1. Subtract total cost of goods sold (COGS) from total revenue for a set period. The resulting number is gross profit/loss.

   Example: Revenue -- 2,000, COGS -- 3,000.

   2,000-3,000=-1,000<-Gross Profit

2. Divide the gross profit by the total revenue or sales for the selected period. The resulting number is the gross margin in decimal form.

   Example: -1,000/2,000=-0.5

3. Move the decimal point two spaces to the left for the Gross Margin percentage.

   Example: -0.5=-50%

   A -50% gross margin means for every dollar this company makes, they spend $1.50.

References

• Southern Utah University: Income Statement Ratios
• Investopedia: Gross Margin

Resources

• Inc.; Tips for Calculating Your Gross Margin; Eric Markowitz; Oct. 2010