Gross margin is gross profit divided by revenue after direct cost of goods or services; net margin is net income divided by revenue after the broader set of expenses. On $100,000 of revenue with $60,000 of cost of goods and $25,000 of operating and other expenses, gross margin is 40.00% and simplified net margin is 15.00%.
What gross margin vs net margin means
Gross margin measures revenue left after direct cost of goods or services, while net margin measures income left after all expenses included in net income. A profit-margin calculator can show the revenue-minus-cost percentage entered; gross-versus-net analysis identifies which additional costs are excluded from that first percentage.
| Revenue | $100,000 |
|---|---|
| Cost of goods | $60,000 |
| Gross profit | $40,000 |
| Other expenses | $25,000 |
| Simplified net income | $15,000 |
Gross margin vs. net margin: which costs belong in each?: worked example
A retailer has $100,000 of revenue and $60,000 of inventory cost, leaving $40,000 gross profit. Gross margin is $40,000 divided by $100,000, or 40.00%. Rent, payroll, marketing, interest, and taxes total $25,000 in the illustration, leaving $15,000 net income. Net margin is $15,000 divided by $100,000, or 15.00%.
How to calculate gross margin vs net margin
Use the same revenue period for both ratios. Gross margin = (revenue minus direct cost of goods or services) divided by revenue. Net margin = net income divided by revenue. Document the cost policy before comparing businesses, periods, or products.
Use the relevant inputs with these related Calculatort pages: profit-margin calculator · cash-flow guide · break-even calculator.
Read the numbers before making a decision
Revenue check 1. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 1 when it examines revenue at $100,000, cost of goods at $60,000, and gross profit at $40,000. Identify the unit for revenue in pass 1 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 1, recording the changed revenue makes the result traceable rather than a headline number.
Cost of goods check 2. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 2 when it examines cost of goods at $60,000, gross profit at $40,000, and other expenses at $25,000. Identify the unit for cost of goods in pass 2 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 2, recording the changed cost of goods makes the result traceable rather than a headline number.
Gross profit check 3. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 3 when it examines gross profit at $40,000, other expenses at $25,000, and simplified net income at $15,000. Identify the unit for gross profit in pass 3 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 3, recording the changed gross profit makes the result traceable rather than a headline number.
Other expenses check 4. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 4 when it examines other expenses at $25,000, simplified net income at $15,000, and revenue at $100,000. Identify the unit for other expenses in pass 4 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 4, recording the changed other expenses makes the result traceable rather than a headline number.
Simplified net income check 5. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 5 when it examines simplified net income at $15,000, revenue at $100,000, and cost of goods at $60,000. Identify the unit for simplified net income in pass 5 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 5, recording the changed simplified net income makes the result traceable rather than a headline number.
Revenue check 6. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 6 when it examines revenue at $100,000, cost of goods at $60,000, and gross profit at $40,000. Identify the unit for revenue in pass 6 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 6, recording the changed revenue makes the result traceable rather than a headline number.
Cost of goods check 7. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 7 when it examines cost of goods at $60,000, gross profit at $40,000, and other expenses at $25,000. Identify the unit for cost of goods in pass 7 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 7, recording the changed cost of goods makes the result traceable rather than a headline number.
Gross profit check 8. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 8 when it examines gross profit at $40,000, other expenses at $25,000, and simplified net income at $15,000. Identify the unit for gross profit in pass 8 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 8, recording the changed gross profit makes the result traceable rather than a headline number.
Other expenses check 9. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 9 when it examines other expenses at $25,000, simplified net income at $15,000, and revenue at $100,000. Identify the unit for other expenses in pass 9 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 9, recording the changed other expenses makes the result traceable rather than a headline number.
Simplified net income check 10. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 10 when it examines simplified net income at $15,000, revenue at $100,000, and cost of goods at $60,000. Identify the unit for simplified net income in pass 10 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 10, recording the changed simplified net income makes the result traceable rather than a headline number.
Revenue check 11. A margin schedule labels direct cost separately from overhead and financing; a percentage has no meaning until the included cost pool is written down on pass 11 when it examines revenue at $100,000, cost of goods at $60,000, and gross profit at $40,000. Identify the unit for revenue in pass 11 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 11, recording the changed revenue makes the result traceable rather than a headline number.
Common mistakes
Do not call markup margin, put rent into cost of goods for one month and operating expense for the next without explanation, subtract taxes twice, or compare a gross margin with another company's net margin.
Where this calculation stops
Cost classification can differ by business model and accounting standards. Returns, discounts, depreciation, financing, taxes, owner compensation, and nonrecurring items can change a reported margin.
Source and verification
The U.S. Small Business Administration's finance guidance directs businesses to use financial statements and cash-flow records; the exact classification in a reported margin must follow the business's accounting records. Read the named source. For this illustration, verify the source date and the controlling record for revenue before relying on the result.