What is gross margin?
Gross margin is what remains of sales after the company has paid for its purchases and third-party services. With that gross margin it then pays its staff, depreciation on investments, interest and taxes. Whatever is left after that is profit.
Note: the Belgian gross margin is not the same as the international gross margin. Internationally, only the cost of goods sold is deducted. In Belgian annual accounts, all services and other goods are deducted as well (item 61): rent, energy, phone, accountant, subcontractors and a director paid through a management company.
Calculate gross margin: the formula
Gross margin = revenue + change in stock + own work capitalised + other operating income − purchases − services and other goods
In account items: 70 + 71 + 72 + 74 − 60 − 61 = item 9900.
For most shops and service companies, 71, 72 and 74 are small or zero, and it boils down to: revenue minus purchases minus services.
Example: Bakkerij De Zoete Korst
The fictitious bakery sold €820,000. It bought €290,000 of flour, butter, sugar and packaging, and paid €150,000 for services and other goods: shop rent, energy for the ovens, the accountant and maintenance.
- Revenue (70)€820,000
- Purchases (60)−€290,000
- Services (61)−€150,000
- Gross margin (9900)€380,000
- Step 1
Subtract purchases
Raw materials and goods for resale, item 60.
€820,000 − €290,000 - Step 2
Subtract services and other goods
Item 61. Gross margin is €380,000, or 46.3% of revenue.
− €150,000 = €380,000
- Staff
- Depreciation
- Other costs, interest and taxes
- Profit
Of the €380,000 gross margin, €290,000 goes to wages and social security. After depreciation, interest and taxes, €24,000 of profit remains.
Why do small companies not show revenue?
Belgian companies file their annual accounts with the Central Balance Sheet Office of the National Bank, in a format that depends on their size. Small companies use the abridged format, the smallest the micro format.
In those two formats, the income statement may start at gross margin: revenue and purchases may be combined into item 9900. Showing them is allowed, but not required. This way the law prevents competitors, customers and suppliers from seeing exactly how much a small company sells and buys.
| Full format | Abridged and micro | |
|---|---|---|
| Revenue (70) | required | not required |
| Purchases (60) and services (61) | separate | may be combined |
| Gross margin (9900) | can be derived | always visible |
| Staff costs (62) | separate | separate |
For anyone assessing a small company, gross margin is therefore the best comparable figure for the size of its activity. Nummo shows it for every company, and shows revenue when it is published.
How to read gross margin
- Compare it with staff costs: if more than 70 to 80 percent of gross margin goes to wages, little is left for the rest.
- Look at the trend: a falling gross margin shows up in profit later.
- Compare within the sector. A wholesaler has a small gross margin on a lot of revenue, a consultancy a large margin on little revenue.
- When revenue is known, gross margin as a percentage of revenue says something about pricing and purchasing costs.
Calculate it yourself
To calculate gross margin for another company, enter the figures from its annual accounts. The item numbers follow the Belgian format, which builds on the European Accounting Directive.
- Gross margin on revenue46.3%