What is a gross margin?
A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. - investopedia.com
How do we determine the actual gross margin (or sales margin)?
To determine the actual sales margin we need to measure how much of every dollar in sales stays with the company as gross profit after accounting for the cost of the items sold. Their are many factors that can go into this calculation; overhead costs (lease payments, utilities, equipment life span), employee wage costs, material costs, shipping/delivery, just to name a few. All of this can be determined by performing a Cost of Goods Sold Study (CGSS). Having a CGSS performed will provide a detailed report of every aspect of your business right down to the time it takes for an employee to complete a job.
This study can also determine which products/services have the highest profit margin within the company. Having this information allows you to focus on sales for this product/service.
One of the most overlooked areas of sales for a small business is sales margins. You could do everything right and still not have a completive advantage if you ignore sales margins. - Jacob Cane | How To Create A Competitive Advantage
Gross Margin Analysis
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How do margins differ from a profit and loss statement?
Viewing a P&L and analyzing your company’s gross sales margins is the difference between knowing a boat is sinking or staying a-float versus knowing where the boat is leaking, how to fix it and then hoisting the main sail and picking up speed. You may know if you're profitable or losing money (from the P&L), but you have to see which products/services are helping or hindering your company’s profitability.
Using margins to determine company efficiency
By analyzing gross margins for different product lines/services provided within a company, we can determine the efficiency of the company by sector. Using this data when measuring employee efficiency and setting aggressive performance targets stream-lines productivity and increases profits.