Question: What Is The Difference Between Gross Margin And Return On Investment?
Celestine Onwu, Nnewi
Answer: Gross margin, usually expressed in percentage terms, is the financial ratio that compares revenue and direct costs. Gross margin is what you get when you deduct direct costs from income. It is closely with the mark-up on cost price, meaning that a business with a high gross margin is likely to make more money than a business that is barely covering its costs.
Gross margin includes inventory and cost of labour but excludes such indirect costs of sales like rents, salaries and advertising. Adequate gross margins generate revenue to fund the operations of the business. A new business, due to start-up costs, is likely to report poor return on investment in the beginning. But gross margin is expected to improve as the business survives its early years.
Return on investment is the amount derived from a given investment. It is expressed as a percentage of the amount originally invested.
For example, where an investment of N100 yields a total amount of $120, the N20 earned by (and added to) the original investment will be counted as a 20 percent return on the investment. The N20 will be recorded as net return on the investment.
As gross margin predicts return on investment, it serves as useful financial information for the business owner to assess the performance of the business.