Gross margin or gross profit margin is an important financial metric that measures the profitability of a company’s core business activities, particularly the production or sale of goods or services. It is expressed as a percentage and represents the proportion of total revenue that remains after deducting the cost of goods sold (COGS), which includes the direct costs associated with producing or acquiring the goods or services.

The formula for calculating gross margin is as follows:

Gross Margin = [(Total Revenue – COGS) / Total Revenue] * 100

Here’s a breakdown of the key components:

1. Total Revenue: This represents the total income generated by the company from the sale of goods or services, including revenue from sales, discounts, and returns.
2. Cost of Goods Sold (COGS): COGS includes the direct costs associated with the production or acquisition of the goods or services that a company sells. These costs include:
   • The cost of raw materials and components used in production.
   • Direct labor costs related to the production process.
   • Manufacturing or production overhead costs, which may include rent for the production facility and utilities.

Gross margin is typically expressed as a percentage by multiplying the result by 100. It provides insight into how much of each dollar of revenue is available to cover operating expenses and contribute to profit after accounting for the direct production costs. A higher gross margin indicates that a company is more effective at controlling production costs and generating profit from its core business activities.

SME Hishab reports your gross margin in real time basis. You will find your gross margin in the CFO Dashboard.