Gross margin

Gross margin is gross profit expressed as a percentage of revenue: gross profit ÷ revenue. Gross profit is revenue minus cost of goods sold, so gross margin tells you how much of every sales dollar is left after paying the direct cost of what you sold — the money available to cover operating expenses and produce a profit.

It appears at the top of the profit and loss statement, just below revenue and COGS. A business with $100,000 in revenue and $60,000 in COGS has $40,000 in gross profit and a 40% gross margin — 40 cents of every sales dollar survives the direct cost of the sale.

Gross margin is one of the most revealing figures a business has: it shows whether the core product or service is fundamentally profitable before overhead, and it’s the lever pricing and cost decisions move directly. A slipping gross margin — rising costs not passed through, or discounting that ate into the line — is an early warning that no amount of revenue growth fixes.

It is only trustworthy if COGS is drawn correctly and consistently. Lumping operating expenses into COGS or scattering direct costs into overhead makes the margin look better or worse than it is and breaks period-to-period comparison — which is why a correct COGS line, and reading margin on accurate financial statements, comes first.

They’re easy to confuse and they aren’t the same. Gross margin is gross profit as a percentage of the selling price; markup is the same profit as a percentage of the cost. A product that costs $60 and sells for $100 carries a 40% margin (40 ÷ 100) but a 67% markup (40 ÷ 60). Using one figure when you mean the other is a common pricing mistake — the same dollars, two different percentages.