What is Gross Margin?
Gross margin...gross profit...gross profit margin. WHAT? Are these the same? Basically. Gross margin is a line item on the P&L (or income statement) that measures profitability. This is giving us a percentage of the money we’ve earned vs. the costs of products/services that we've sold.
You can find the gross profit number on the Income Statement in a dollar amount. Once you have that number, you divide it by total revenues, to get a percentage (or the margin). This ratio explains how productive a company is from the costs they spent to produce their products. Essentially...how much money do we have leftover once we've bought and sold our inventory?
From a leadership standpoint, gross margin is a simple but distinctive metric to help give value to their products. Are the products and services valuable? Is the price point fair? Does the company have an efficient pricing and cost structure? Is the company effective in the way their managing their costs, and selling their products and services? The higher the margin, the more effective the company's management is in generating revenue for each dollar of cost.
It feels like the financial world is trying to confuse all of us regular folk. It is common to have many names to make the same point, and there are multiple ways to get the same number. This is one of those cases. We give a brief overview to many of these confusing acronyms, check it out!
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