What is gross margin?

How to calculate it

The formula is straightforward: gross margin = (revenue minus direct costs) divided by revenue, expressed as a percentage. If your business turns over £100,000 and your direct costs are £60,000, your gross margin is 40%. That means for every pound of revenue, 40p is left to cover overheads, pay yourself, and generate profit.

What counts as a direct cost?

Direct costs (also called cost of sales) are the costs that only exist because you delivered a product or service. For a restaurant, that includes food and drink ingredients. For a plumber, it includes materials and subcontractor labour. For an agency, it includes freelancer costs on client projects. Rent, insurance, and your salary are not direct costs. Those are overheads.

Why gross margin matters more than revenue

A business doing £500,000 in revenue at a 20% gross margin has £100,000 to cover all overheads and profit. A business doing £300,000 at a 50% gross margin has £150,000. The smaller business is in a stronger position. Revenue measures activity. Gross margin measures whether that activity is worth doing.

If your gross margin is declining month on month, it means your costs are rising faster than your prices. That trend, left unchecked, will eventually make the business unviable regardless of how busy you are. Spotting it early is the point of tracking it monthly.

How CFO Pal tracks your gross margin

CFO Pal calculates your gross margin automatically from your Xero, QuickBooks, or Sage data. It tracks the trend month by month and alerts you if your margin drops below a threshold you set. No spreadsheets. No manual calculations. The number is always current.