Gross margin is a percentage that indicates how well a small business retains its gross profit. A higher gross margin indicates that a business is more profitable. For example, a business with a gross margin of 40 percent can retain 40 cents from each dollar of revenue it generates.
To calculate gross margin, take the following steps:
Determine the total sales revenue of the business.
Add up all the costs of sales, including the costs in producing or purchasing the goods and sales commissions, to determine the cost of goods sold.
Subtract the cost of goods sold from the revenue, and divide the difference by the revenue.