What Is Gross Margin
The amount of profit a company gets after production costs or the goods sold by a company. People use gross margin to know how much profit the product will give and what prices should be set of a product to get a desirable profit. Gross profit does not tell anything about the firm. GM is written in percentage, which is also known as gross margin. There are many industries and every industry has a different gross margin of their profits. The retailers have less profit than a company. The investor can determine actual place of the company in the market with the help of gross margin. There are some types of GPM:
- Gross profit can increase,
- It can go down, or
- It could remain the same.
The increase in gross margin means that a company has good results or the company’s production is increasing, which is bringing profit to the company. Gross will go up or increase when the cost drops and price remains constant. When the firms don’t have any pricing power or the cost increase due to change in prices the gross margin is said to be decreased. The gross margin will decrease when the cost remains constant and the price decrease. People should also go through other things while calculating gross margin for a fair calculation like the position of the company in the market, the company’s level, new products which the company is launching. It is always necessary for the investors to know what causes gross margin to change. People should not allocate all the cost just because they can allocate them, but they should keep gross margin concept in their mind. Always have desirable and useful information about the company and necessary goal before any management decision. If one doesn’t have good knowledge of gross profit the investors should always consult some professional in this field so that the money he /she going to invest in certain company will not bring loss to the investor.
How to calculate gross margin:
- Collect the sales income for the product or the company and the cost of goods sold. Subtract the gross profit number also known as sales income of the company from the cost of goods sold, which will give you the sales minus cost.
- You can get gross percentage when you will divide the above answer buy the profit no. of the gross.
- Now change the answer into percentage. For e.g. .65 will become 65 percent.
Industries have many ways to tell how good or poor their business is going with the help of many ratios and calculations. Gross margin is a way to show the profit of a company or product in the form of percentage.