Understanding Accounting – Part One: Gross margin is just training in the park .
You want to understand numbers. But your accountant confused you. Or maybe you took an accounting course in college and have PTSD from the experience.
It’s not that hard. Let’s start with Gross Margin. Gross margin is the profit you make on the thing you are doing RIGHT NOW for your customer. In the fitness example, let’s take a simple example of training a client in a park.
Anyone honest in fitness knows that you need NO Equipment and NO facility to get into great shape. If you have a local park and you know body weight exercises, you don’t need anything else.
Now, sure, having equipment helps, especially for beginners. And it’s nice to have a place to work out in the dead of winter.
But for understanding the idea of gross margin, the park is great.
The money you’d earn training someone in a park is what accountants call gross margin or gross profit.
If you’re doing the training yourself, then your gross margin is exactly what your client pays you. An accountant would say you have 100% gross profit.
If you give your client to another trainer in that same park, your gross margin is what the client pays you less what you have to pay the trainer. Say, if the client pays you $100 and you pay the trainer $50 you have $50 gross profit (or %50 margin).
Once you start training folks in a gym, your gross margin is still everything that could be done in that park.
But you’re not going to want to stay out in the cold forever. In my next post, we’ll talk about expenses.