Gross margin is revenue minus the direct cost of goods or services sold, expressed as a dollar amount or a percentage, showing how much is left to cover overhead and profit.
Gross margin (or gross profit) isolates the profitability of what you sell before overhead. Revenue minus cost of goods sold, the direct costs of producing or delivering, leaves the gross margin. As a percentage it shows how many cents of each sales dollar remain to cover rent, salaries, marketing and profit.
Gross margin is one of the most diagnostic numbers a business owner watches. A falling margin signals rising input costs or underpricing before it ever shows up in net profit, and comparing margins across products or services reveals which lines actually make money.
A shop sells $100,000 of product that cost $60,000 to buy. Gross margin is $40,000, or 40%. That 40 cents on each dollar must cover all overhead and still leave a profit.
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