gross margin

Gross margin is a financial metric that represents the percentage of revenue remaining after subtracting the cost of goods sold. It is calculated by dividing gross profit by total revenue and multiplying by one hundred. The measure shows how efficiently a company produces and sells its products before accounting for operating expenses.

Context and Usage

Gross margin is primarily used in financial accounting, business analysis, and investment valuation contexts. Financial analysts, business owners, investors, and accountants utilize this metric to assess operational efficiency and profitability. It is commonly found in income statements, financial reports, and business performance dashboards across manufacturing, retail, and service industries.

Common Challenges

Common challenges include confusion between gross margin and markup, leading to pricing strategy errors. Misclassification of direct versus indirect costs can distort the calculation, while inconsistent accounting periods may create misleading comparisons. Some businesses overlook hidden production costs or fail to account for returns and allowances, resulting in overstated gross margins.

Related Topics: net profit margin, operating margin, cost of goods sold, gross profit, profitability ratios