What is Gross Margin?

If you run a toy store, you buy a game for $3.00, sell it for $4.00, you have a gross margin of $1.00. Business used to use the term "Gross Profit" instead of "Gross Margin", but this has the connotation that the business has made money. This may not be true! More about that later.

So from our accounting process, how do we determine "Gross Margin". The example above should give us a clue! The formula is:

Gross Margin = Gross Revenue from Sales - Direct Costs of Sales.

From this we get the most important metric in business, Gross Margin Percent, or GM%. The formula is:

GM% = (Gross Margin/Gross Revenue from Sales) X 100.

In our toy store example that gives us a GM% of 25%. You should ensure that you know your GM% of your monthly P&L, of your year to date P&L, of your last weeks operations, of each and every department, of each and every job. Simply put, you need to know the GM% of every single thing you do in your business.

And you need to know it today!