A business gross margin is a rough gauge of how profitable its operations are it
measures how much sales revenue the company retains after all the direct
costs associated with making a product or providing a service are accounted for
direct costs refer to materials labor
and expenses related to producing a
product overhead expenses such as
management salaries and the cost of
building a corporate headquarters are
not direct costs the greater of business
margin the more money it will have to
invest in other important areas such as
marketing and research gross margin is
generally quoted as a percentage of the
company sales just take revenue
generated for a given period subtract
the production expenses otherwise known
as the cost of goods sold and divide
this entire figure by revenue let's take
a look at Rose candy company the company
earns annual revenue of 1 million
dollars and has a cost of goods sold
totaling $700,000 this gives the company
a gross margin of 30%
this means that Rose candy retains 30
cents from each dollar of total revenue
made say that Rose candies main
competitor Lilly chocolate enjoys a
margin of close to 40 percent this could
mean that Lilly chocolate has lower
input costs such as raw materials and
wages for its factory workers it could
also mean that Lilly chocolate gets away
with selling and higher prices by
offering specialty items in either case
Rose candy will likely want to adjust
its strategy to remain competitive in
the long run while it doesn't give an
investor the whole picture when it comes
to profitability gross margin is extremely useful as a yardstick to make
sure that a company is operating with maximum efficiency.