Frequently Asked Questions

How is gross margin calculated?

Gross margin, also known as gross profit, is a key profitability metric for a company. It’s calculated by subtracting the direct cost of goods sold from the net sales. The direct cost of goods sold includes all the direct costs incurred in making and delivering the products or services that contributed to sales. It doesn’t include office rent, salaries, and other expenses that aren’t directly connected with sales. The net sales amount is the revenue from sales remaining after deducting goods returns and sales discounts. Once these direct expenses associated with sales are deducted from this figure, the result is the gross margin. This is the profit before considering operating expenses and taxes. Understanding gross margin is crucial as it provides insight into a company's operational efficiency. It reflects how well a company manages its direct costs relative to its revenue. A higher gross margin indicates that the company is more efficient in turning raw materials and labor into revenue.