Gross Margin
Definition
Gross margin is the percentage of revenue that exceeds the cost of goods sold (COGS), representing the proportion of sales revenue a company retains after direct production costs.
Explanation
Gross margin is calculated as (Revenue - COGS) / Revenue × 100. It measures how efficiently a company produces its products or services. A higher gross margin indicates more money available to cover operating expenses and generate profit.
Gross margin varies significantly by industry. Software companies typically have high gross margins (70-80%), while retail and manufacturing businesses have lower margins (20-50%). Improving gross margin is a key driver of profitability.
Example
A company generates $1 million in revenue with $400,000 in cost of goods sold, resulting in a gross margin of 60%.