Gross margin

Definition

What is left of revenue after the direct cost of delivering it.

Why It Matters

It is the first number that says whether a business can carry overhead and a loan payment, and it separates two businesses with identical revenue into one that works and one that does not. Compare it against the trade rather than against other trades: 30% is thin for software and strong for a distributor. Watch its direction across three years more than its level in any one, since a margin sliding two points a year is a pricing problem that a good current number hides.

In numbers: A business doing $2M of revenue at a 38% gross margin keeps $760,000 to cover rent, admin, the owner and the debt, where the same revenue at 28% keeps $560,000.