By KYN AI Advisory Team — AI implementation specialists, Singapore
Gross margin is the share of revenue left after the direct cost of what you sold. Net margin is the share left after every cost, including overheads, interest and tax. If you sell S$1,000,000 and the direct cost is S$600,000, gross margin is 40%. If overheads, interest and tax take another S$350,000, net margin is 5%. Gross margin tells you whether the product earns its keep. Net margin tells you whether the business does.
What are the formulas?
Gross margin % = (Revenue − Cost of sales) ÷ Revenue × 100
Net margin % = Net profit ÷ Revenue × 100
Cost of sales (also called cost of goods sold, or COGS) is the cost directly tied to delivering what you sold: materials, direct labour, subcontractors, freight in, and payment processing fees for some businesses. Overheads such as rent, admin salaries and marketing sit below gross profit.
Many people use "margin" and "markup" as if they were the same. They are not.
| Measure | Formula | Cost S$60, price S$100 | |---|---|---| | Margin | (Price − Cost) ÷ Price | 40% | | Markup | (Price − Cost) ÷ Cost | 66.7% |
Quote one and label it. A 40% markup gives a 28.6% margin, which is a common source of mispriced quotes.
Worked example
A trading company with S$1,200,000 revenue.
| Line | Amount | % of revenue | |---|---|---| | Revenue | S$1,200,000 | 100% | | Cost of sales | S$780,000 | 65% | | Gross profit | S$420,000 | 35% | | Salaries (non-production) | S$190,000 | 15.8% | | Rent and utilities | S$60,000 | 5% | | Marketing | S$30,000 | 2.5% | | Other overheads | S$45,000 | 3.75% | | Operating profit | S$95,000 | 7.9% | | Interest | S$12,000 | 1% | | Tax | S$14,000 | 1.2% | | Net profit | S$69,000 | 5.75% |
Gross margin is 35%. Net margin is 5.75%. The 29-point gap is the cost of running the business. To improve net margin, you have two levers: lift gross margin through price or direct cost, or reduce overheads relative to sales.
What do the two margins tell you differently?
- Gross margin diagnoses pricing and production. A falling gross margin points to supplier cost, discounting, waste or a shifting product mix.
- Net margin diagnoses the whole structure. A falling net margin with a stable gross margin points to overheads growing faster than sales.
Read them together. A business with 70% gross margin and 2% net margin has a cost structure problem. A business with 15% gross margin and 6% net margin runs lean on volume, and a small price cut hurts it badly.
What are typical margins by industry?
Ranges vary by country, size and business model. The most usable public reference is the sector dataset by Aswath Damodaran of NYU Stern. His margins by sector table, updated January 2026, covers 5,994 US firms, so it describes listed US companies, not Singapore SMEs. Use it as a rough order of magnitude.
| Industry (US) | Firms | Gross margin | Net margin | |---|---|---|---| | Software (system and application) | 309 | 71.72% | 25.49% | | Retail (general) | 23 | 33.18% | 5.61% | | Restaurant and dining | 64 | 32.24% | 9.37% | | Engineering and construction | 48 | 15.46% | 5.94% | | Trucking | 26 | 21.19% | 3.79% |
Source: Damodaran, "Margins by Sector (US)", data as of January 2026.
Two cautions. First, listed companies are larger than most SMEs and have different cost bases. Second, the definition of cost of sales differs by company, which moves the gross margin more than the net margin. Compare net margins first, then gross margins within a similar business model.
How should an SME benchmark itself?
- Compare to your own history. Your last twelve months by month is the most relevant comparison.
- Compare product lines or customers. A 38% blended gross margin may hide a 55% line and a 15% line.
- Compare to peers you can see. Industry bodies, banks and your accountant often hold anonymised ranges for your trade.
- Compare to a public sector table, with the cautions above.
Segment margin is the most useful of these. It tells you which product or customer to push, reprice or drop.
Which costs belong in cost of sales?
Classify consistently. A common split:
| Cost of sales | Overheads | |---|---| | Materials and goods bought for resale | Admin and finance salaries | | Direct production labour | Rent of the office | | Subcontractors on delivery | Marketing | | Freight in and import duties | Software not used in delivery | | Project-specific software or licences | Professional fees |
For services, put the time of people who deliver the work in cost of sales, and the time of people who sell or administer it in overheads. A mixed role needs an allocation that you set once and apply every month.
What mistakes distort margins?
- Counting deposits received as revenue before delivery.
- Missing accruals for costs incurred but not yet billed, which flatters the month. See month-end accruals for companies without a finance team.
- Leaving stock adjustments to year end.
- Mixing foreign currency at inconsistent rates.
- Treating owner salary as zero. Net margin looks higher than a replacement manager would produce.
How do you act on a margin that is too low?
Work in this order, because each step is cheaper than the next.
- Check the data. A wrong classification or a missing supplier bill produces a false alarm. Fix the ledger before the price list.
- Check discounting. Compare average realised price with list price by customer. Discounts given without a rule erode gross margin quietly.
- Check direct cost. Compare supplier prices and freight against the last twelve months. A cost step of 3% on a 35% gross margin business takes about a point off the margin.
- Check mix. If sales shifted toward a low-margin line, the blended margin falls with no change in any price.
- Check overheads against revenue. If net margin fell while gross margin held, an overhead line grew faster than sales.
Only after these should you consider a price rise, which carries volume risk, or a cut in service levels.
How do you keep the margin report current?
The report needs a clean ledger and a stable mapping from accounts to cost of sales and overheads. Once that exists, margin by month, by product and by customer can be produced automatically from the ledger and delivered to whoever acts on it. Keep the mapping in a table a person owns, so that changes are deliberate and logged.
Where KYN fits
KYN builds finance systems and reports that run in a cloud account in your name. For a manufacturer, we built a ledger of 3,309 reconciled rows with zero duplicates, which is the base a margin report needs. The department reports reach each team on WhatsApp at 06:30, at about S$0.05 a report.
The 14-day review covers your chart of accounts and how costs are allocated, because margin depends on both. A full build ships in under 90 days. See finance systems.
Frequently asked questions
Is a higher gross margin always better?
No. A high gross margin with heavy overheads can leave a lower net margin than a lean, lower-margin business. Look at both, and at the absolute profit.
Which margin do banks and investors look at?
Both, plus operating margin and cash conversion. A lender looks at whether operating profit covers interest. An investor looks at whether gross margin leaves room for growth spending.
How often should I calculate margins?
Monthly, after the books close. Calculate by product or customer quarterly. If you only calculate yearly, you find out about a pricing problem twelve months late.
Checked 30 October 2026.
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