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.