Gross margin is an indicator representing the amount of income minus the associated costs of manufacturing a product. It helps to evaluate the profitability of a business at a basic level. To calculate the gross margin, you need to subtract the cost of goods sold from the total profit, and then divide the result by it. The percentage value will show the profitability. In simple terms, the gross margin is the percentage of income that exceeds the cost of goods sold. Gross margin is indicated as the Gm1 indicator, which is sometimes confused with Gm2. Let's look at the financial indicators Gm1 and Gm2 and see what they are:
Gm1 is Gross Margin, gross profit, i.e. the difference between revenue from the sale of goods and the costs of their production, sale. This indicator is expressed as a percentage. It is precisely about Gm1 (gross margin) that we will talk further.
Gm2 is Net Margin, i.e. net profit. This indicator shows what profit the business received minus all costs for manufacturing, selling goods and managing the company. It can be expressed as a percentage.
That is, Gm2 takes into account more expenses than Gm1, while Gm1 is limited only by the cost of production and sales of products.
Why Calculate Gross Margin
First of all, to evaluate the results of the business. If the gross margin is always negative, this means that the company may soon go bankrupt. And all because it will not have enough money to cover related expenses, such as paying for office rent and transferring taxes.
However, this is not the only reason to track the metric. Gross margin is calculated to:
evaluate the profitability of production or trade. The data mexico telegram data obtained will help to understand what profit the company will receive from each unit of goods sold;
form prices. If you calculate the gross margin for 10-30 products that bring in the majority of the business's income, you can revise the pricing strategy for other products. And then set KPIs;
find points of profitability growth. Based on the results of the marginality assessment (profit and cost of goods sold), the business can identify areas where it is possible to reduce costs without damage.
Where is Gross Margin Used?
The indicator allows you to make a decision based on financial data. The purposes of its application:
making forecasts and spending the budget correctly. Calculating expected profitability and assessing the cost of goods sold help determine the overall profitability indicator. This information can be used to correctly redistribute resources, revise investment programs, and for other purposes;
performance evaluation. By comparing the actual margin with industry profitability statistics, it is possible to evaluate the company's performance and sometimes revise the management strategy;
investment analysis. A company that wants to attract investors must have a good profitability percentage, since investors will not be interested in a business with low margins.