Gross Margin Percentage Ratio and QuickBooks 2012 - dummies

Gross Margin Percentage Ratio and QuickBooks 2012

By Stephen L. Nelson

The gross margin percentage ratio is one of several profitability ratios you can use along with QuickBooks 2012 to analyze your profitability. Also known as the gross profit margin ratio, the gross margin percentage shows how much a firm has left over after paying its cost of goods sold. The gross margin is what pays the operating expenses, financing expenses (interest), and, of course, the profits.

The gross margin percentage ratio uses the following formula:

gross margin/sales
A Simple Income Statement
Sales revenue $150,000
Less: Cost of goods sold 30,000
Gross margin $120,000
Rent 5,000
Wages 50,000
Supplies 5,000
Total operating expenses 60,000
Operating income 60,000
Interest expense (10,000)
Net income $50,000

For example, using the data shown earlier, you can calculate gross margin percentage as follows:


This formula returns the value of 0.8, meaning that gross margin equals 80 percent of the firm’s sales.

No guideline exists for what a gross margin percentage should be. Some firms enjoy very high gross margins. Other firms make good money even though the gross margin percentages are very low. In general, of course, the higher the gross margin percentage, the better.

Small businesses should enjoy high gross margin percentages. It’s common to assume that a small business can get away with a lower gross margin percentage than some large competitors can. However, in my experience, that isn’t really true.

Gross margin percentages should be higher for small businesses because small businesses often can’t get the economies of scale that large businesses can get. A low gross margin percentage may work just fine for a Walmart, for example. However, it’s tough for a small retailer to work with such a small gross margin percentage.