Understanding the concept
What is Gross Margin?
When you make a sale, you don't keep all the money. First you subtract what it cost you to make or deliver that product. What's left is your Gross Profit. Gross Margin is that profit expressed as a percentage of your revenue — it tells you how efficiently you convert sales into profit before overheads.
Gross Profit
=
Total Revenue − Total COGS
Gross Margin %
=
( Gross Profit ÷ Total Revenue ) × 100
COGS includes these four components
🧱
Raw Materials
Total cost of physical materials used to make your products this month
📦
Packaging
Boxes, bags, labels, wrappers for all units sold this month
👷
Direct Labour
Wages of workers who physically make your product — not admin or sales staff
🚚
Inward Freight
Shipping cost to receive raw materials from your supplier to you
Do NOT include in COGS: Rent, electricity, internet, admin salaries, marketing costs, delivery to customers, or sales team salaries. These are operating expenses — they reduce net profit but are not part of gross margin.