Gross Margins

The gross margin calculation is an excellent means of measuring the performance of a business enterprise. It takes into account the outputs and variable costs of the enterprise and produces a figure which can be compared with similar enterprises; known as benchmarking, or can be compared with results from previous years as a means of defining how well the enterprise is performing over time. The gross margin represents the amount of total sales revenue that the farm enterprise retains after incurring the direct costs associated with producing what it sells.

Gross margin calculations, however, do not produce the profit (or loss) generated by the enterprise, as they do not take into account the fixed costs (overheads) that may be attributable to the overall business. However, a Whole Farm Gross Margin can combine the results from all on-farm enterprises, from which total fixed costs can be subtracted to indicate profitability.

Gross margin calculations are universal measures in benchmarking programmes and, while they have to be analysed carefully to account for the differences in farm systems or herd sizes, provide a good level of detail whereby an enterprise's strengths and weaknesses can be assessed.