Gross Margin calculator

Understanding your business’s profitability is key to making smart financial decisions. Our free Gross Margin Calculator makes it easy to determine your gross margin instantly, helping you assess how efficiently your business generates profit from sales.

Here, we’ll explain what gross margin is, how it differs from other financial metrics, and why it matters for your business. Regardless of whether you’re calculating gross margin for your entire business,  or a specific product or service, this tool can provide valuable insights to support pricing and strategy decisions.

Use the calculator below to get started, or read on to learn more about gross margin and how to calculate it effectively.

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Use the tool below to determine your margin for a specific product, service, or your entire range of sales.

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What is Gross Margin?

Gross margin is a key profitability metric that shows the percentage of revenue retained after covering the direct costs of goods or services sold. It helps businesses understand how efficiently they generate profit from sales before factoring in operating expenses, taxes, and other costs.

A higher gross margin indicates better profitability, which in turn can allow more room for reinvestment and pricing adjustments.

Gross vs. Net Margin

While they are both important financial metrics, gross margin and net margin measure different aspects of profitability. 

On one hand, gross margin looks at revenue after deducting only the cost of goods sold. Net margin, on the other hand, accounts for all expenses, including operating costs, taxes, and interest.

In other words, gross margin reflects how efficiently a business produces and sells its products or services. Net margin provides a complete picture of overall profitability. For example, a business with a high gross margin but a low net margin may have high operating expenses cutting into its profits.

Gross Margin vs Gross Profit

Gross margin and gross profit are related but serve different purposes. Gross profit is the total monetary value remaining after subtracting COGS from revenue, whereas gross margin expresses this as a percentage.

Both make it easier to compare profitability across different businesses or products, and also across time periods. 

For instance, if a business earns £100,000 in revenue and has £40,000 in COGS, the gross profit is £60,000, and the gross margin is 60%. Understanding these metrics can prove particularly useful in helping businesses identify cost inefficiencies.

How to calculate Gross Margin

Gross margin is typically expressed as a percentage and can be calculated by using the following formula:

Gross Margin (%) = [(Revenue - Cost of Goods Sold) ÷ Revenue] × 100

You can apply this calculation to different levels of your business, from the entire company to specific products or services. For example:

For the entire business

To calculate gross margin for your whole business, use the total revenue and total cost of goods across all products and services:

• Total Revenue: The total sales generated over a period.

• Total COGS: The direct costs of producing goods or delivering services.

Example: If your company earns £500,000 in revenue and has £300,000 in COGS:

Gross Margin = [(£500,000 - £300,000) ÷ £500,000] × 100 = 40%

For a specific area of your business or portfolio

If your business has multiple divisions, product categories, or service lines, you can calculate the gross margin for each area separately by using its respective revenue and COGS.

• Identify the revenue generated by that segment.

• Deduct only the direct costs associated with that segment.

Example: A retail business has two divisions: clothing and electronics. If the clothing division generates £200,000 in revenue with £120,000 in COGS:

Gross Margin for Clothing = [(£200,000 - £120,000) ÷ £200,000] × 100 = 40%

For a specific product/service

To assess profitability at the product or service level:

• Take the sales revenue for that product/service.

• Subtract the direct costs, including materials, production, and delivery costs.

Example: If a software subscription sells for £100 per month and incurs direct costs of £30 per customer:

Gross Margin = [(£100 - £30) ÷ £100] × 100 = 70%

The importance of Gross Margin

Gross margin is important because it measures how efficiently a business generates profit after covering direct costs. It provides insight into profitability, and shows whether a company is making enough money from sales to cover expenses and sustain growth. 

A healthy gross margin indicates strong financial performance, while a declining margin can signal rising costs, pricing challenges, or even operational inefficiencies that may compound any external issues.

As such, tracking gross margin is a vital step in identifying any cost-saving opportunities. If margins are shrinking, it may suggest higher material costs, inefficient production or the need for better pricing strategies.

Likewise, gross margin is also important for investors and lenders connected with a company. If strong, it can suggest stability and growth potential, which can make the business more attractive for investment.

Final thoughts

As we’ve seen, understanding and tracking your gross margin can offer crucial insights into your financial health. Using our free Gross Margin Calculator will help you stay on top of costs, optimise your pricing strategies, and ensure long-term financial sustainability.

Want more? Check out more tools and resources to support your business decisions with QuickBooks' range of calculators and templates.

They include these other useful tools:

• Income Tax Calculator – Estimate your tax liabilities as a self-employed professional.

• Cost Price Calculator – Determine your cost price and set profitable selling prices.

• Working Capital Calculator – Evaluate your short-term financial health and liquidity.

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