Gross Margin

Gross margin is the money you have left after paying the direct cost of what you sold (materials, merchandise, production labor), but before other expenses like rent. It's often expressed as a percentage of sales; it shows whether your business is generating enough profit to cover the remaining costs.

Brief

Sales less the direct cost of what was sold
Often displayed as a percentage of sales, for example 40%
That's what's left to pay the rent, the administration, and, in the end, your profit.
A shrinking profit margin often indicates a problem with prices being too low or costs being too high.

Why does this matter?

Think of gross margin as what's left in your pocket after you've paid for the direct cost of the sale. If you sell $200,000 worth of goods and services and those sales cost you $120,000 in materials and merchandise, you're left with $80,000, or 40%: that's your gross margin. It's with this $80,000 that you then pay rent, office salaries, and everything else. If this percentage decreases from month to month, your prices or purchasing costs are slipping. Bankeo connects you with a free, verified accountant/CPA who monitors your gross margin and compares it to your industry benchmarks, and we'll be there to support you every step of the way.

Frequently asked questions

What exactly is gross margin?

This is what you keep on a sale after paying your direct cost, before overhead. On a shirt sold for $50 that cost you $30 to buy, the gross margin is $20, or 40%.

How do you calculate it?

You take your sales and subtract the direct cost of what was sold. Example: $200,000 in sales minus $120,000 in direct costs gives $80,000, or a rate of 40%.

What is the difference with net profit?

Gross margin is calculated before overhead costs (rent, administration, advertising). Net profit is what remains at the very end, after these costs and taxes have been paid. Bankeo provides you with a free, verified accountant/CPA to monitor both, and we'll be there to support you every step of the way.