{"id":"concept:gross-margin","kind":"concept","label":"Gross Margin","synonyms":["gross profit"],"definition":"Gross margin is revenue minus the direct cost of goods or services sold, before general operating expenses are subtracted, and it measures how much a sale earns before overhead.","summary":"Sales minus Cost of Goods Sold, before rent, software, or other overhead comes out. BalanceMCP's profit and loss reports raw totals — Sales, Cost of Goods Sold, Rent — rather than a calculated margin percentage; you or your accountant compute the ratio from those figures for your specific business.","explanation":["Gross margin measures how much a sale earns before general operating costs — rent, software, insurance — are subtracted. It's revenue minus the direct cost of producing or delivering what was sold, usually recorded in Cost of Goods Sold: materials, subcontracted labor, or inventory bought for resale.","Worth being direct about what BalanceMCP does and doesn't calculate here: a profit and loss statement reports raw totals — total income, total expenses, net income — not derived ratios like a gross margin percentage or expenses as a share of revenue. If a specific margin matters to how a business is run, it's calculated from the P&L's own totals, or discussed with an accountant who knows which ratios are worth tracking for that particular business.","Concretely, take a month with $9,600 in Sales and Service Revenue and $2,300 in Cost of Goods Sold. Gross margin for that month is $7,300 — the amount left over before Rent, Software & Subscriptions, and every other operating expense come out. Net income, further down the P&L, subtracts those operating costs too, landing at a smaller final number.","Where exactly the line falls between Cost of Goods Sold and ordinary Operating Expense is a real judgment call that varies by business — a subcontractor's labor on a specific job is usually COGS, while the office's general software subscription is usually an operating expense — and it's worth confirming the distinction with an accountant if it isn't obvious for a given cost."],"commonMistakes":["Expecting BalanceMCP to surface a gross margin percentage automatically — the P&L reports raw totals; the ratio is calculated separately from them.","Confusing gross margin (revenue minus direct cost of goods sold only) with net income (revenue minus every expense, including overhead).","Miscategorizing a general overhead cost as Cost of Goods Sold, or vice versa, which distorts the gross margin calculation even if net income still comes out correct."],"category":"statements","questions":[{"question":"Does BalanceMCP calculate my gross margin percentage for me?","answer":"No — the P&L reports raw totals for Sales and Cost of Goods Sold. You'd calculate the margin from those totals yourself, or ask an accountant which ratio matters for your business."},{"question":"What's the difference between gross margin and net income?","answer":"Gross margin only subtracts the direct cost of what was sold. Net income goes further, subtracting every operating expense — rent, software, insurance — as well."}],"url":"/glossary/gross-margin","relatedTo":[{"id":"concept:cost-of-goods-sold","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Acost-of-goods-sold"},{"id":"concept:profit-and-loss","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Aprofit-and-loss"},{"id":"concept:net-income","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Anet-income"},{"id":"concept:operating-expense","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Aoperating-expense"},{"id":"concept:revenue-recognition","relationship":"related","weight":0.9,"api":"/api/knowledge/concept%3Arevenue-recognition"},{"id":"account:5000-cost-of-goods-sold","relationship":"references","weight":0.7,"api":"/api/knowledge/account%3A5000-cost-of-goods-sold"},{"id":"guide:how-to-read-a-profit-and-loss-statement","relationship":"references","weight":0.7,"api":"/api/knowledge/guide%3Ahow-to-read-a-profit-and-loss-statement"}],"referencedBy":[{"id":"concept:profit-and-loss","label":"Profit and Loss Statement","url":"/glossary/profit-and-loss"},{"id":"concept:net-income","label":"Net Income","url":"/glossary/net-income"},{"id":"concept:cost-of-goods-sold","label":"Cost of Goods Sold","url":"/glossary/cost-of-goods-sold"}],"license":"https://creativecommons.org/licenses/by/4.0/","attribution":"BalanceMCP — https://balancemcp.com"}