Calculate your gross profit and gross margin percentage from total revenue and cost of goods sold.
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Gross profit is Revenue minus Cost of Goods Sold (COGS), meaning the direct costs of producing what you sold: materials, direct labor, and manufacturing overhead. Gross margin expresses that as a percentage: Gross Profit ÷ Revenue × 100.
For example, 100,000 in revenue with 60,000 in COGS leaves 40,000 in gross profit, a 40% gross margin.
COGS covers only the direct cost of producing goods or delivering services sold. It excludes indirect costs like marketing, rent, administrative salaries, and interest, those are subtracted later to arrive at net profit margin.
Including indirect costs like rent, marketing, or admin salaries in COGS, which artificially depresses gross margin, COGS should only cover the direct cost of producing what was sold.
Confusing gross margin with markup, a 40% markup on cost is not the same percentage as a 40% gross margin, the two are calculated from different bases.
Tracking gross margin without also tracking gross margin trend over time, a single snapshot can look fine while the underlying trend is quietly eroding.
Gross margin only subtracts the direct cost of goods sold, while net profit margin subtracts every business expense, including operating costs, interest, and taxes. Gross margin is always higher than or equal to net margin.
It depends heavily on industry. Software businesses often see gross margins above 70%, while retailers and manufacturers often run between 20% and 50%. Compare against similar businesses in your sector.
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