Gross margin is what remains from sales after paying for the goods sold, before rent, salaries, power and other overheads. It is the first number to check when a business is busy but not making money.
Gross margin = sales − cost of goods sold
Gross margin % = gross margin ÷ sales × 100An example
A hardware dealer sells a ball valve for ₹260 that cost ₹200 landed. Gross margin is ₹60, or 23% of the selling price.
Margin and markup are different
The same ₹60 is a 30% markup on cost and a 23% margin on sales. Confusing the two is a common pricing mistake: a trader who wants a 30% margin and adds 30% to cost ends up with 23%.
What lowers it quietly
- Discounts and kasar given at payment.
- Goods returns that are resold as seconds.
- Freight and loading not added to the cost.
- Schemes to distributors counted as expenses.
A true gross margin needs the landed cost of each item and every discount set against the bill it belongs to. Comparing it by item, customer and month shows which lines carry the business.