On the one hand, the gross margin is the percentage of profit you get before subtracting any expenses other than production expenses. That is, before subtracting the expenses of the business in general (salaries, taxes, rent, etc.).
And on the other hand, the net margin establishes a relationship between net profit (what you have left after paying expenses) and income.
But they do have one thing in common: both gross and net amounts are regularly expressed as a percentage, although they differ in how they are calculated.
How to calculate net margin?
To calculate net margin, you divide net bosnia and herzegovina phone data profit (revenue minus expenses) by sales revenue. Sales revenue is what you earn from selling your products and services. Then, multiply by 100 to get your percentage.
The formula would look like this:
Net margin: net profit / sales revenue x 100
Keep in mind that the gross margin will always be greater than the net margin because expenses are not subtracted from the former.
What is gross margin used for?
Calculating gross margin will allow you to identify and analyze trends that occur over a given period. You can also use it to compare yourself with other similar businesses and see if you are doing well, if your profit is in line with what is happening in your business sector.
Furthermore, this margin is an indicator that will allow you to evaluate how much sales influence the final results of your business. It can also function as a metric that tells you if direct production costs are efficient.
Gross margin is also an essential decision-making tool. If this margin is too low, for example, you may need to adjust your production and manufacturing budget to increase your profits.
And let's not even talk about investment decisions. Those who want to invest in your venture will keep an eye on this indicator. Why? Simply because they want to know what percentage of your project's income is kept as profit.
In addition to this calculation, they will also want to analyse other factors such as cash flow or the solvency ratio.
Other reasons that lead them to look at the gross margin are that it helps them to know how much money the shareholders could receive and to compare competing ventures with each other. They can also use this margin to project what decisions you might make in the future about your venture.
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