Gross Margin (GM) is the lifeblood of a retailer. Simply defined, it is the difference between the net sales and the merchandise cost. Gross Margin Percent (GM%) is the further relationship of Gross Margin to Net Sales.
The calculation is relatively straightforward:
Gross Margin % = Gross Margin x 100
Net Sales
While Gross Margin is important, a better indicator of performance is Gross Margin %. As sales are actualized, they may show significant variance from the plan. How many GM $ you realize will inevitably also vary from your plans. But, by using GM% you have a more accurate indicator of your performance on a week-to-week, monthly or seasonal basis.
Planning your GM% is a vital part of understanding how to run a successful retail operation. With planned margins too high, customers may see you as overpriced and will look elsewhere to shop. Too low, and you may have trouble with cash fl ow and staying alive. Retailers can impact GM% by either lowering costs or raising prices. Raising prices is easier, but can be
deadly to the consumer. Lowering the cost of goods is not an easy task, but may provide the retailer with a significant competitive advantage.
