Gross Margin
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It tells you how much of every dollar in sales is available to cover operating expenses and generate profit. The formula is: (Revenue − COGS) ÷ Revenue × 100. A higher gross margin means more room fo
Gross Margin Definition
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It tells you how much of every dollar in sales is available to cover operating expenses and generate profit. The formula is: (Revenue − COGS) ÷ Revenue × 100. A higher gross margin means more room for overhead, marketing, and growth.
Gross Margin in Practice — Example
A small candle company generates $80,000 in monthly revenue. The wax, wicks, fragrance oils, jars, and direct labor to make the candles cost $28,000. Gross margin is ($80,000 − $28,000) ÷ $80,000 = 65%. That means for every dollar in sales, 65 cents is available to cover rent, marketing, salaries, and profit. If gross margin drops to 50%, the owner knows production costs are eating into the business.
Why Gross Margin Matters for Your Books
Gross margin is the first profitability metric every business owner should track. It tells you whether your core product or service is financially viable before overhead enters the picture. If your gross margin is too thin, no amount of cost-cutting on the operating side will save you.
Tracking gross margin over time reveals trends. If it's shrinking, supplier costs may be rising, pricing may be too low, or production efficiency is slipping. If it's growing, your pricing power is increasing or you're finding cost savings in production.
Gross margin also varies widely by industry, so it's important to benchmark against peers. A software company might run 80% gross margins while a restaurant operates at 30%. Knowing where you stand relative to your industry helps you set realistic goals and identify problems early.
How Gross Margin Shows Up in QuickBooks
On the QBO Profit & Loss report, gross margin appears as Gross Profit (Revenue minus COGS). QBO doesn't show the percentage automatically, but you can enable "% of Income" column in the report customization settings. This adds a percentage column showing each line item as a percent of total revenue—making gross margin immediately visible. For product-based businesses, ensure all direct costs are categorized as COGS accounts, not operating expenses.
Common Mistakes
FAQ
Q: What's a good gross margin for a small business?
A: It depends on the industry. Service businesses often see 50-80%. Retail and e-commerce range from 30-50%. Restaurants typically run 25-35%. Compare to your specific industry benchmarks.
Q: How is gross margin different from markup?
A: Gross margin is the profit as a percentage of the selling price. Markup is the profit as a percentage of the cost. A 50% gross margin equals a 100% markup. They describe the same profit from different perspectives.
Related Terms
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