...this is the one: Gross profit margin.
Most owners think they know it. Then they actually look at it properly and go, “oh… right… that explains a lot”.
Let’s break it down without turning this into an accounting lecture from 1997.
It’s the percentage of your revenue you get to keep after covering the direct costs of delivering what you sell.
In human language: it shows how much you make from your core work, before overheads like rent, admin wages and your ever-growing subscription stack jump in and take their cut.
A strong margin means your business can actually breathe.
A weak one means your business is basically holding its breath while swimming laps.
This stuff is easy to point at. You can touch it, trip over it, store it or panic-buy it because you forgot you were out.
Common COGS include:
👉 The cost of buying the product from your supplier
👉 Raw materials used to make what you sell
👉 Freight and shipping to get stock in
👉 Packaging that goes out with the product
👉 Labour directly involved in producing the product.
If the cost rises or falls based on how many units you sell, it’s probably a direct cost.
This is where people start squinting at their P&L like it’s a magic eye poster.
Direct costs often include:
👉 Wages for team members who do the actual client workContractors on specific jobs
👉 Software you must have to deliver the service
👉 Job-specific materials
👉 Fees you pay to specialists brought in for the job
👉 If the cost only exists because a client job exists, that belongs here.
What’s not a Direct Cost:
People sneak things in here all the time because it makes their margin look better than reality.
But these expenses are overheads (or fixed costs):
👉 Admin wages
👉 Rent, electricity and the office coffee order
👉 Sales & Marketing costs
👉 General software subscriptions
👉 Owner drawings or wages
👉 Motor vehicle costs not tied to specific jobs
When Direct Costs is clean and consistent, your margin becomes a far more accurate tool.
The formula is stunningly simple:
Gross Profit Margin = (Revenue – Direct Costs) / Revenue × 100
Or, if you prefer the “tell it to me like I’m tired” version:
Margin = Gross Profit ÷ Sales
Quick example:
You sell $20,000 worth of product.
It costs you $12,000 to buy or produce that product.
Gross profit is $8,000.
8,000 ÷ 20,000 = 0.40
Your gross profit margin is 40 percent.
Done. No spreadsheet wizardry required.
1. It tells you if your pricing is actually working
If your margin is thin, something’s off. Either your price needs to lift or your costs need to calm down.
2. It instantly reveals cost creep
Suppliers love a sneaky price rise. Your margin will dob them in every time.
3. It predicts cash flow issues before they get loud
Cash flow problems don’t start in the bank account.
They start in the margin. Quietly. Like ninjas.
4. Banks, investors and potential buyers obsess over it
A good margin makes your business attractive.
A bad margin makes your business “a project”.
5. It shows which products or services are actually pulling their weight
Some parts of your business are the breadwinners.
Others are basically doing work experience.
Margin analysis sorts them out fast.
There isn’t one number for everyone. Each industry has its own benchmark.
The ATO often publishes benchmarks for each industry so if you google your industry + ATO benchmarks, you will often find this.
If you're not sure what your benchmark should be, a good accountant (cough PAL) can help you sanity-check it.
Your gross profit margin is one of the cleanest, simplest, most telling metrics in your business.
Track it.
Notice it.
Respect it.
If it suddenly changes, that’s your cue to investigate with the intensity of someone who just heard a weird noise under their house.
If you want help tightening up your margin, understanding it or building it into your monthly reporting, we’re always here to make the numbers make sense.
– The team at PAL (making accounting slightly less boring since way back when)
Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!
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