Why Gross Margin is an important metric?

We are looking at the word gross margin. Gross margin is a company’s total revenue minus by the COGS (cost of goods sold), divide by the total revenue, expressed as a percentage. The gross margin represents the percent of total revenues that a company retains after incurring direct costs associated with producing goods and services it sells.

The higher the percentage, the more the company retains, to service its other costs and debt obligations.

Gross margin is an important metric for business owners to pay attention to. Gross margin will measure how their production costs related to their revenues.

Consider this scenario; if a company’s gross margin is falling, the business owner may look at the processes that allow it to cut labor cost or ask for suppliers to offer lower costs on materials. Alternatively, the company may increase prices to boost revenue.

Furthermore, a business owner can use gross margin to forecast how much money they have left over from sales to cover other operating expenses. For example, if the company has a 40% gross margin, it knows the business has $0.40 of each revenue collected to cover operating expenses.

Lastly, the gross margin can also be used to measure company efficiency.

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Disclaimer: This blog is for information purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon.