Virtual CFO

Really understanding your gross margin

Really understanding your gross margin

Let’s talk about your Gross Margin. Do you know what your margin is on the stock you sell or the services you offer? And if you do know, do you track its development? Often, I receive a yes to the first question, but the second questions is met with a blank stare or we’re told, I don’t need to, it doesn’t change. My response is always, are you sure about that?

So first things first, for those that aren’t all over it, let’s go over what this thing called a Gross Margin actually is. In a nutshell, your gross margin is the difference between what you invoice a customer for a product, and what you paid the supplier for that product, plus your on costs (inbound freight, duty, packaging ect). Different industries will have different margins on products, however your margin should be at a level that it covers your overhead/fixed business costs and leaves you with a reasonable profit.