Gross Margin: The Daily Definition
What is gross margin?
Gross margin, also referred to as gross profit margin, is a percentage that represents your company’s overall profitability. It is calculated by subtracting your cost of goods sold (or COGS) from your total revenue for a given period, then dividing that amount by that same total revenue.
If your total revenue for the first quarter was ten million dollars and your cost of goods sold (COGS) was five million, your gross margin is 50% — great hypothetical job!
$10 million total revenue – $5 million COGS = $5 million in gross profit
$5 million gross profit / $10 million total revenue = .5, or 50% gross margin
Our two cents:
When taking a look at your books, don’t confuse gross profit for gross margin. This is easy to do, but they are two different calculations that mean different things to your accountants. They are very similar, but it’s important to know the difference. Just remember that a margin is a percentage, not a number.
Easy access to gross margin information is one of the best ways to know whether or not your company is performing well. Unfortunately, real-time access to the data that will give you this information can be hard to come by. If you’re a distribution industry professional and figuring out your gross margin requires digging into your accounting software, that’s a problem. Your success as a company relies on your ability to make those critical decisions that drive profits, and gross margin data is a big part of that.
When you’re down in the trenches, you need to know what’s turning a profit and what’s not. That’s why SalesPad’s ERP solutions give you real-time access to your gross margin for every single transaction. After all, you’re in this business to make money, right?