It can feel pretty satisfying to see the revenue pouring in as your retail business starts to take off, but it’s also important to keep an eye on how much you’re spending to earn those revenues as you grow. Gross margin is a powerful tool for helping you keep a big-picture view of your company’s profitability. You calculate it by looking at your total revenue and comparing it to the costs of the goods you’ve sold. This idea seems simple enough, but this basic calculation lends valuable insight into how your company is doing.
A high gross margin means you’re selling your products much higher than it costs to make them. When the gross margin is high, you make and keep more money for each good you sell. Many factors contribute to your gross margin: customer loyalty, product differentiation, industry competition, and scarcity of materials to make your products. If you’re gauging your gross margin, you’re looking at dozens of variables that influence your company.
To calculate gross margin:
- Determine your company’s total revenue. This includes any purchase discounts you’ve offered clients as well as factoring in any products your client has returned.
- Figure out your total cost of goods sold. If you’re using a cash basis of accounting, this is your current period spend on inventory. If you’re using an accrual basis of accounting, you can choose between the FIFO, LIFO, or average cost methods to calculate cost of goods sold.
- Subtract cost of goods sold from revenue. This difference is your gross profit in dollars, and it represents the amount of money your company has earned before selling, administrative, interest, or tax expenses.
- Divide your gross margin in dollars by your total revenue to discover your gross margin percentage. If your total revenue last year was $100,000 and your total cost of goods sold was $40,000, your gross profit is $60,000 and your gross margin is 60%, or $60,000 divided by $100,000. This means for every dollar of sales, you earn 60 cents to cover fixed costs, research and development, capital investments, and more.
The gross margin is a straightforward measurement, but it tells you a lot about how your company is doing. Leverage QuickBooks to calculate your figures for you, so you have more time to analyze the results. 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.