Gross Profit Margin

Gross profit margin is the percentage of revenue a business keeps after paying the direct costs of what it sells. If revenue is $100 and the goods cost $65 to produce or buy, the gross profit margin is 35%.

Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue × 100

Cost of goods sold (COGS) covers only direct costs: materials, direct labor, and freight in. Rent, marketing, and admin salaries sit below gross profit and do not belong in this calculation.

$210,000 / $600,000 × 100 = 35%

Every dollar of sales leaves 35 cents to cover overheads and, after that, profit.

Margin is profit as a share of the selling price. Markup is profit as a share of cost. A product bought for $65 and sold for $100 has a 35% margin and a 53.8% markup. Mixing the two up when setting prices quietly underprices the product, because a 35% markup on $65 gives a selling price of only $87.75.

Gross margin sets how much each sale contributes after direct costs, before fixed overheads are covered. A thin margin means the business needs far more volume to generate enough gross profit to stay cash positive. Cash Flow Frog projects the cash consequences of that math forward, so you can see whether next quarter's expected sales volume actually clears your fixed cost floor or leaves a gap to fund.