Gross Margin Calculation

Scubadevils

Hi All,

I wonder if someone can help me please. I'm doing a startup business forecast for potential investment purposes - as part of this I obviously need to include revenue, gross margin, costs and profit before tax - I'm doing this out to 3 years. The challenge I have is on gross margin - the business is software based which we will create in it's entirety, therefore as there is no cost involved to produce, am I right to assume 100% gross margin? Presumably then things such as the staff, premises, computers etc all come in under costs and not gross margin? Struggling with it as I've always been used to COGS versus the selling price and as such having a gross margin, having 100% GM seems odd!

Any help appreciated!

2moreMinutes

COGS is not necessarily just the purchase price of whatever it is you're selling.

Without knowing anything at all about software production, the cost of employing staff involved in producing the software, any software/goods/materials/etc bought to enable those staff to produce the software for sale would be direct costs.

Voltex

Scubadevils wrote: »

Hi All,

I wonder if someone can help me please. I'm doing a startup business forecast for potential investment purposes - as part of this I obviously need to include revenue, gross margin, costs and profit before tax - I'm doing this out to 3 years. The challenge I have is on gross margin - the business is software based which we will create in it's entirety, therefore as there is no cost involved to produce, am I right to assume 100% gross margin? Presumably then things such as the staff, premises, computers etc all come in under costs and not gross margin? Struggling with it as I've always been used to COGS versus the selling price and as such having a gross margin, having 100% GM seems odd!

Any help appreciated!

Don't get too hung-up on the gross margin. Just work out the direct costs of producing every unit (e.g. is there customer training included, man hours for each installation).
Service based businesses have a much higher proportion of their costs in OH as opposed to traditional industries such as manufacturing.

Johnny_BravoIII

You don't always have COGS.
For example:
Service Industries typically have NIL direct costs.

Sales 100,000
Less COGS 0
Gross Profit 100,000

LESS Overheads/Fixed Costs

Wages
Insurance
Light & Heat
Motor & Travel
etc
etc

Total Overheads

Net profit