Gross Margin
Gross Margin is a company's net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations. The net sales figure is simply gross revenue, less the returns, allowances, and discounts.[1]
Gross Margin is an indicator of whether a company is running an efficient operation and if its sales are good enough. Gross Margin is also known as Gross Profit Margin. However, the term “Profit Margin” by itself may refer to any of the following margins:
- Operating Profit Margin
- Pre-Tax Profit Margin
- Net Profit Margin
Each of these profit margins weigh the cost of doing business with or without certain costs factors. For instance, operating profit margin is calculated without interest or tax, while net profit margin considers all expenses related to the production of a product (it’s also known as “the bottom line”).[2]
Gross Margin Can be an Amount or an Expense[3]
Gross margin could be expressed as:
- An amount (also known as gross profit)
- A percentage of net sales (also known as gross profit percentage or gross margin ratio)
The gross margin may be calculated for an individual product, a product line, or for the entire company.
- ↑ Definition - What Does Gross Margin Mean? Invetopedia
- ↑ Explaining Gross Margin Freshbooks
- ↑ Gross Margin Can be an Amount or an Expense Accounting Coach