Gross margin shows how much money a business keeps after covering the cost of producing goods or services. It’s the difference between sales revenue and the cost of goods sold (COGS). Gross margin is usually shown as a percentage and helps measure how profitable a business is before accounting for other costs like rent, wages, or marketing.
How to Calculate Gross Margin
The formula is:
(Revenue – Cost of Goods Sold) ÷ Revenue × 100
Example:
If a business makes £10,000 in sales and the COGS is £6,000, the gross margin is:
(10,000 – 6,000) ÷ 10,000 × 100 = 40%
This means 40p of every £1 in sales is left after covering direct costs.
Why Gross Margin Matters
- Tracks profitability by showing how well a business controls production costs.
- Helps with pricing decisions — low margins may mean prices are too low or costs are too high.
- Supports planning and growth by showing how much is left to reinvest in the business.
What’s Included in COGS?
COGS usually includes:
- Raw materials
- Labour directly involved in making products
- Manufacturing or production costs
It doesn’t include general expenses like admin, rent, or marketing.