Gross margin is what’s left after the direct cost of what you sell — it judges your pricing and buying. Net margin is what’s left after everything — it judges the whole machine.
Price and negotiate with gross margin. Decide on overheads, hiring and expansion with net margin. A healthy gross margin with a thin net margin means the product works but the structure is heavy.
Watch both monthly, per branch or product line where you can. One number for the deal on the table, one for the company you’re building.
They answer different questions
Gross margin asks whether the thing you sell makes money. Net margin asks whether the business around it makes money. You can have a healthy answer to one and a terrible answer to the other, and the fix is completely different in each case.
If gross margin is weak, the problem is pricing, procurement or delivery cost. Cutting overheads will not save it — you cannot cut your way out of selling at the wrong price.
If gross margin is strong and net margin is thin, the problem is the cost of running the company. More sales will not fix that. It will scale the overhead too.
Getting the split right in the first place
Most SME accounts we review classify at least one cost in the wrong place, which makes both numbers wrong.
The test is direct causation. If you sold one more unit, or delivered one more job, would this cost increase? Site labour, materials, subcontractors, freight, project staff — yes, cost of sales. Office rent, admin salaries, audit fees, the CEO's car — no, overhead.
Delivery drivers and warehouse staff are the usual argument. If they scale with volume, they belong above the gross-margin line. Put them wherever you like, but put them there consistently, because a margin that moves because of a reclassification tells you nothing.
Watch the direction, not the level
A 22% gross margin means nothing in isolation. It is excellent for a distributor and alarming for a consultancy.
What matters is the trend against your own history. A margin drifting down half a point a month for six months is a three-point problem that nobody flagged, because no individual month looked wrong.
Track it monthly on one line. The month it moves more than a point, find out why before the next order is priced.
The margin question nobody asks
Which customers are actually profitable?
Blended gross margin hides enormous variation. In most trading and contracting businesses, a handful of accounts sit well below average — usually the largest ones, because they negotiated hardest and everyone was afraid to lose them.
Split gross margin by customer for the top ten. The result is frequently uncomfortable and always useful. Sometimes the answer is a price conversation. Sometimes it is accepting a low-margin account because it absorbs fixed capacity. Either is fine — deciding by accident is not.
Which one runs the business
Gross margin, monthly, by customer, is the number that tells you whether your commercial decisions are working. Net margin is the scoreboard.
Owners who watch only net margin find out about a pricing problem a year late, when the audited accounts arrive.
Key points
- Weak gross margin is a pricing or cost-of-delivery problem
- Weak net margin with healthy gross margin is an overhead problem
- Classify by direct causation, and stay consistent
- The trend matters far more than the level
- Blended margin hides your least profitable customers
Practical checklist
- Test every cost: would it rise with one more sale?
- Fix misclassified costs and restate prior months
- Track gross margin monthly on a single line
- Investigate any move greater than one point
- Split gross margin by your top ten customers
- Decide deliberately which low-margin accounts to keep
