How to Calculate Gross Margin Percentage

Gross Margin Percentage for your Business Plan

The gross margin is one of the many accounting terms a business needs to understand. Gross margin is the real income a business earns by selling its products, it is the revenue left after deducting the cost of sales.

Gross margin = Revenue – Cost of sales

In the financial projections template gross margin, shown on the income statement, is calculated as a percentage of forecast revenue using the gross margin percentage.

Gross margin = Revenue x Gross margin %

We have created a free gross margin calculator showing how to carry out a gross margin calculation, which is available for download at the link below.

Gross Margin Percent Calculation

The gross margin percentage required for use in the business plan is that for the business as a whole. For an existing business, this can be obtained from historical data and is given by the gross margin percentage formula:

Gross margin % = (Revenue – Cost of sales) / Revenue

For a new business it may be possible to estimate the gross margin by looking at industry data or from the published accounts of comparative businesses in the same industry.

An alternative approach is to calculate the gross margin for each of the businesses products individually, and then combine these as a weighted average gross margin % based on estimated sales levels for each product. This approach is obviously easier when there are only a few products, but can be utilized by grouping products into categories.

The formula to calculate profit margin for a product is as follows:

Gross margin % = (Selling price – Product Cost) / Selling price

To assist you in calculating a gross margin percentage, we have provided a free gross margin % calculator, available at the link below.

This calculator allows the product cost to be built up from its cost components and, by entering a retail price, will calculate the gross margin percentage and also the markup percentage for each product or product group.

If there are a number of products, the individual gross margin percentages calculated for each product, can be used to calculate the overall gross margin for the business by using our free weighted average gross margin calculator, available at the download link below,

Template Gross Margin Definition

The gross margin definition for use in the financial projections template is the difference between the revenue and the cost of sales.

At a product level it represents the difference between the selling price of your product and its purchase cost or its manufacturing cost.

Gross margin definition = Selling price – Purchase cost

Industry Specific Gross Margin Percentage Templates

The gross margin percentage for your business will depend on the type of industry in which it operates. We have created gross margin percentage templates for a number of industries, some of which are listed below:

Gross Margin Projection Templates

More templates are available in our Business Templates Section, and more will be added in the future. If your industry is not listed contact us and let us know, and we’ll try to help.

What’s the Next Step?

The next step in producing a five year financial projection for your business model using our financial projections template is to learn how to forecast the operating expenses for your business.

This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business model.

Last modified July 31st, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

You May Also Like