Gross Margin Calculation Formula

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Gross margin (in %) = (Revenue – Cost of goods sold)/Revenue.

The calculation results in an indicator that shows the company's earnings minus the costs of manufacturing or selling goods.

Let's give an example of how to calculate the gross margin ratio using the formula:
The revenue of the company "Dom" was 1 million rubles, and the cost of goods sold was 500 thousand rubles. The profitability ratio will be 50%. It can be calculated as follows: (1,000,000 - 500,000) / 1,000,000 = 500,000 / 1,000,000 = 0.5, or 50%.

Thus, from every ruble earned, the Dom company keeps exactly half for itself, since the same amount is spent on the production and sale of products.

Let's say "Dom" sells a household set for exactly 100 rubles, and spends 50 rubles on its production. To find out the marginality, you need to subtract the cost of goods sold from the revenue, and divide the final value by the revenue:
Overall profitability ratio = (100 rubles – 50 rubles)/100 rubles = 50 rubles/100 rubles = 0.5, or 50%.

That is, for every 1 ruble of revenue there is only 50 kopecks of profit, and the remaining 50 kopecks go to operating expenses.

If the margin is high, the business is working effectively. It is especially good when the profitability percentage is higher than the costs of manufacturing and selling the product. This means that the company sells its goods at a price higher than the cost of production.

Pros and Cons of Gross Profit Margin Ratio
Calculating marginality has its advantages and disadvantages. Let's start with the advantages:

transparency. You can calculate the gross margin using a calculator, knowing the amount of revenue and the cost of goods sold for a certain period;
gain insight into pricing. Gross margin will tell you which products are the most profitable so you can sell them more actively;
business efficiency assessment. By comparing profitability with competitors' indicators, you can evaluate the results of work and find new growth points;
the ability to save data and analyze it further. The marginality percentage can be easily entered into an Excel or Google Sheets table and then used to analyze the company's work for different periods.
Flaws:

the indicator does not take into account routine expenses. For the calculation, they use profit and cost of products, but do not take into account the costs of advertising, rent of premises, etc. But they also significantly affect the efficiency of the business;
wide range. The ideal marginality value depends on the industry, the specifics of the company's work, and the business processes taking place in it. Since there is no universal coefficient, it is difficult to compare yourself with competitors;
other KPIs are not taken into account. Gross marginality is an independent indicator, but to get a more accurate picture, other company performance results need to be taken into account.
How to increase marginality
There are several ways to do this.

Reduce manufacturing costs where possible. Don't oman telegram data reduce manufacturing costs at the expense of product quality, as this may alienate customers.
Increase sales. To do this, you need to develop a marketing strategy and improve the work of managers. If the sales volume increases, then the marginality will increase, since the costs will be distributed over a larger number of units of goods.
Expand the product line, eliminate unprofitable items and otherwise work with the assortment. This will also increase marginality, especially if you sell goods with good profitability more actively.
Maintain business profits as much as possible. All non-operating expenses must be reduced and costs must be constantly monitored.
Conclusion
Here are the main conclusions:

The gross margin formula helps calculate the overall profitability of a business as a percentage to assess its efficiency. If a company is operating at a loss, it needs to review production, product range, and development strategy.
It is impossible to define a universal gross margin indicator. It will differ depending on the company's field of activity, business processes and products sold. You can use approximate values ​​in the industry as a basis.
Gross margin does not take into account expenses for renting premises, paying taxes, etc. Therefore, to get an accurate picture of the profitability of the business, you need to analyze other KPIs.
Gross margin is therefore a fundamental metric that helps you manage your business more efficiently by identifying the potential for cost reduction and profit increase.