Guides · Bookkeeping
Gross margin vs net margin
Gross margin and net margin both measure how profitable a business is, but they measure it at different points. Watching both tells an owner where money is made and where it leaks away.
What gross margin measures
Gross margin is what is left of a sale after the direct cost of what was sold — the goods or the materials and labour that went into them. It shows whether the core selling activity makes money before overheads.
A healthy gross margin is the foundation; if it is thin, no amount of cost-cutting elsewhere will save the business.
What net margin measures
Net margin is what is left after everything — the direct costs plus rent, salaries, interest, and the rest. It is the bottom line: the portion of each rupee of sales the business actually keeps.
The gap between gross and net margin is where the overheads live, and watching it shows whether the business's fixed costs are in proportion to what it sells.
How Lekha fits
Lekha records the sales and the bills that feed both margins, keeping the picture current rather than reconstructed at year-end.
Lekha records what your documents say and tracks the money on both sides — what you owe and what you are owed. It records and tracks; it does not replace your accountant.
Questions
- What is the difference between gross and net margin?
- Gross margin is what remains after the direct cost of what was sold; net margin is what remains after all costs, including overheads. Net margin is the true bottom line.
- Why watch both margins?
- Gross margin shows whether the core selling activity makes money; net margin shows what the business keeps after overheads. The gap between them is where overheads sit.
- Which margin matters more?
- Both. A thin gross margin cannot be fixed by cutting overheads, while a healthy gross margin can still be eaten by overheads, which net margin reveals.