Why it matters
It helps explain how pricing, purchasing and direct delivery costs affect the business. The cost categories need to be consistent for comparisons to be useful. A retailer may focus on product purchase costs, while a service business needs a clear policy for direct delivery costs. Management contribution measures can differ, so label them properly.
A practical example
A simplified retailer has £50,000 sales and £30,000 cost of goods sold. Gross profit is £20,000 and gross margin is 40% of sales. A 40% margin is not the same as a 40% markup on cost: in this example the markup is about 66.7%.
A common misunderstanding
Gross profit is not the final profit and is not the bank balance. Rent, administration, finance costs and tax can still need to be considered. An improving percentage also may not compensate for a large fall in the volume of sales.
General information for UK readers, updated 3 November 2026. Examples are illustrative. Tax treatment depends on the facts and current rules; seek advice before making a decision.