What is the Gross Margin?

The Gross Margin (or Gross Margin) represents the sales of a company in a certain period less than the cost of these sales.

It represents the profit that a company obtains from its sales after subtracting the direct costs necessary to produce the goods or services.

How to calculate the Gross Margin?

1- (+) Revenues: are the income that the company obtains from the sale of its products or services and is obtained by multiplying:

  • Units Sold: The units that the company has sold.
  • Sale price: the price for which you have sold these units.

2- (-) COGS:

  • Units sold: in this case, we take back the units sold and NOT the purchased ones as most people usually think since only the units we have sold are the cost of sales, the rest of the units purchased and not sold do not imply COGS but rather will appear in the inventory.
  • Purchase price: the price for which we have bought these units. The situation could arise in which we would have bought units at different prices, in that case, we will see later how to calculate the purchase price, but for now, we are going to assume the same price for all purchases.

How to integrate the accounts in the Financial Statements?

  • Revenues: will be the first point of the P&L and represent an increase in cash that is reflected through the EBITDA, which in turn will go to the Balance Sheet.
  • COGS: just the opposite of what happens with income, they represent a cash outflow that will reduce our margin.
  • Units purchased that have not been sold: they will be part of the inventory and, therefore, will appear on the Balance Sheet and will represent a cash outflow.

How to interpret the Gross Margin?

The gross margin percentage represents the part of each euro entered that the company obtains as gross margin. For example, if the company has a gross margin of 35% it will mean that for each euro entered it will obtain a gross margin of 35 cents.

The gross margin of a company allows us to assess whether a reduction in profits is due to an increase in direct costs and thus analyze how to reduce those costs, for example by negotiating with suppliers to obtain better prices.