How to Define Gross Margin
Gross margin is one of several financial measurements a company uses in evaluating its financial performance. It shows what a company is earning after costs (for products and/or services) as is a basic measurement as to a company’s profitability. Higher Gross Margin is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business, as well as covering operating expenses.Gross margin can simply be calculated by using Revenue and Gross Profit.
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Instructions
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1
Measure Gross Margin as a percentage. You will need to first calculate your Gross Profit, which requires you have your company's revenue (or sales) information and cost of sales or products and services.
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2
Calculate Gross Profit by taking total Gross or Sales Revenue, minus total Sales Costs. If you sell your widget for $10, and it costs you $4 to make or buy wholesale, your Gross Profit is $6.
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3
Divide your Gross Profit by your Gross or Sales Revenue to get your percentage Gross Margin. Using the example in Step 2, you would divide your Gross Profit of $6 by your Revenue of $10, for a 60% Gross Margin.
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Take a look at the Sample Income Statement in Additional Resources below to get a better sense of how Gross Margin fits in context with a company’s financial statements.
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Tips & Warnings
Note that Gross Margin measures profit before operating expenses, such as paying salaries and turning on the lights.
