What is Gross Margin?
Gross Margin is equal to total revenue minus the total costs to produce products or services. By understanding what their gross margin is, business owners can gauge whether their business is making money or losing money. Once they know their gross margin, business owners can have honest discussions about key factors including reducing supply chain costs, improving operational efficiency, improving raw material sourcing and more.
Gross Margin Example
For example, let’s say that you operate a retail clothiang store. Your total revenue for the year is $300,000, and it cost you $100,000 to buy the clothing.
To calculate your gross margin, you would do this calculation.
Total Revenue                                $300,000
– Total Clothing Costs                   $100,000
Gross Margin          =                     $200,000
Now that this store owner knows what their gross margin is, they can begin to talk about how it can be improved by discussing a wide variety of possibilities including:
- Finding out if there are alternate suppliers who have lower wholesale prices for the clothing they want to acquire
- Talking about how their clothing buyer is negotiating deals and figuring out if the buyer needs sales education to improve
If you’d like to go even deeper and answer the question ‘Why Should A Business Owner Understand Their Gross Margin?’ link.
