Gross Margin Calculator

The gross margin formula

Gross margin % = (revenue − cost of sales) ÷ revenue × 100

Gross profit is what is left of your sales after paying for the goods or direct services you sold. Gross margin expresses that as a share of sales, so you can compare a slow month with a busy one, or this year with last year, without the size of the month distorting the picture. A 38% margin means every R100 of sales leaves R38 to cover rent, salaries and other overheads, and whatever remains after those is profit.

What goes into cost of sales

For a business that holds stock, cost of sales is not simply what you bought this month. It is opening stock plus purchases less closing stock, because stock still on the shelf at month-end has not been sold yet. Include the costs of getting stock ready to sell: inward freight and courier charges, customs duty and clearing fees on imports, and packaging that goes out with the product. A manufacturer adds raw materials and the wages of people on the production floor.

Service businesses have a cost of sales too: subcontractors, materials used on a job and the time of staff who deliver the work. What stays out is the cost of running the business, such as rent, admin salaries, marketing, bank charges, depreciation and interest. Those come off further down the income statement, which the net profit calculator lays out line by line.

Worked example: an online clothing reseller

A VAT-registered reseller sells women's clothing through its own website and social media. In March it started with R86,000 of stock at cost, bought R118,500 from wholesalers and counted R92,300 on hand at month-end. Cost of sales is R86,000 + R118,500 − R92,300 = R112,200.

Sales for the month were R184,000 excluding VAT. Gross profit is R71,800 and the gross margin is 39.0%. Had the owner used purchases instead of cost of sales, the margin would have shown as 35.6%, understating it because some of March's buying is still sitting in stock for April.

For new stock the owner works the other way. A pair of jeans costs R240.00 excluding VAT and the target is a 45% margin, so the price must be R240.00 ÷ 0.55 = R436.36 excluding VAT, or R501.81 on the website including VAT. That is a markup of 81.8% on cost.

Use VAT-exclusive figures

If you are a VAT vendor, the 15% VAT you charge customers is collected on behalf of SARS and the VAT on your purchases is claimed back on your VAT201 return. Neither is your income or your cost, so both sales and cost of sales must exclude VAT. Mixing the two is a common error: the reseller's March sales were R211,600 including VAT, and dividing that against VAT-exclusive costs produces a margin of 47.0% instead of 39.0%.

If you are not registered, there is no output VAT in your sales, but the VAT on your supplier invoices cannot be claimed and stays part of what the stock cost you. Registration becomes compulsory once taxable supplies pass R2,300,000 in any 12 consecutive months (the threshold from 1 April 2026). Registering changes how your margins are calculated, so re-run your prices when it happens. The VAT calculator strips VAT out of an inclusive amount.

How discounts eat into margin

A discount comes straight off gross profit, not off sales in proportion. Take the jeans at R436.36 with a 45% margin. A 10% discount drops the price to R392.73, the margin to 38.9% and gross profit per pair from R196.36 to R152.73, a fall of 22.2%. To earn the same gross profit in rand, the reseller must sell 28.6% more pairs. Run that number before agreeing to a Black Friday promotion.

Margin and markup are different numbers

Margin is measured against the selling price and markup against the cost. The table above shows both side by side: a 50% margin needs a 100% markup. Pricing with one when you meant the other quietly costs a shop its margin, and the markup calculator works through it with an example. Once you know your margin, the break-even calculator shows how much you must sell to cover your overheads.