Gross Margin is an important financial measure that shows the percentage of revenue a business keeps after subtracting the direct costs of producing goods or providing services. This metric reflects how effectively a company controls production expenses in relation to its sales.
The process of calculating gross margin includes:
- Determining total revenue from sales
- Separating the cost of goods sold (COGS) from expenses like materials and labor
- Expressing the result as a percentage of total revenue
Gross margin holds significant value in business decision-making. It helps companies evaluate the profitability of their core operations, determine pricing strategies, and control production expenses effectively. It also serves as a vital indicator for stakeholders to assess financial health and operational efficiency.
Understanding gross margin is essential for businesses aiming to maximize profitability, maintain competitive pricing, and achieve long-term financial stability.
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