Quick answer
Gross margin is the share of each sale left after direct costs such as materials, stock, subcontractors and delivery. Markup is how much you add on top of cost. A 50% markup is only a 33% margin. Growth loans are repaid from gross profit, not revenue, so using the right margin — on the new work specifically — is the single most important input in any payback calculation.
Key points
- Gross margin = (sale price − direct costs) ÷ sale price.
- Markup = (sale price − cost) ÷ cost; the same product always has a higher markup than margin.
- Growth is repaid from gross profit, so margin converts revenue into repayment power.
- Use the margin on the new work — it may differ from your business-wide figure.
- Margin formula
- (Price − direct cost) ÷ price
- Markup formula
- (Price − cost) ÷ cost
- Benchmark source
- ATO small business benchmarks, 100 industries
Ask an owner what a growth move will bring in and you’ll usually hear a revenue number: “another $20,000 a month”. It’s a natural way to think, and it’s the most common reason growth plans look better on paper than in the bank account. Revenue doesn’t repay a loan. Gross profit does. And the bridge between the two is your gross margin.
What’s the difference between margin and markup?
They’re calculated from the same two numbers, which is why they’re so easy to mix up.
| Formula | Product costing $60, sold for $100 | |
|---|---|---|
| Gross margin | (Price − cost) ÷ price | $40 ÷ $100 = 40% |
| Markup | (Price − cost) ÷ cost | $40 ÷ $60 = 67% |
Markup is how you set prices (“cost plus 50%”). Margin is what’s left of each sale. A business pricing at cost plus 50% has a margin of only 33%. If that owner uses 50% in their payback calculation, they overstate the profit on growth by half.
| Markup | Equivalent margin |
|---|---|
| 25% | 20% |
| 50% | 33% |
| 100% | 50% |
| 150% | 60% |
| 200% | 67% |
What counts as a direct cost?
Direct costs rise and fall with sales. Include:
- Stock or materials used
- Direct labour — wages for people whose hours scale with the work (plus super and on-costs)
- Subcontractors
- Freight in and out, packaging
- Merchant, platform or commission fees tied to each sale
Fixed overheads — rent, admin wages, insurance, software — don’t belong in gross margin. But if a growth move adds overheads (a second site’s rent, a new manager), count them separately as new running costs. That’s how our Growth ROI calculator separates the two.
Why does margin matter so much when you borrow?
Because it decides how much growth you need to cover each dollar of repayments.
| Gross margin | Extra sales needed for $1,000 of gross profit |
|---|---|
| 20% | $5,000 |
| 35% | about $2,860 |
| 50% | $2,000 |
| 70% | about $1,430 |
A low-margin business can still grow profitably with borrowed money, but it needs a lot more volume to do it — and volume usually brings more stock, more staff and more working capital. That’s where low-margin growth tips into cash trouble, a pattern described in our guide to overtrading.
A worked example (illustrative)
A commercial cleaning business wins a new office-tower contract worth $22,000 a month. The owner’s first instinct is to use the business-wide gross margin of 38%, suggesting $8,360 a month of gross profit.
But the new contract is night work with penalty rates, needs a dedicated supervisor and uses more consumables. Working the numbers for this contract alone gives a margin of 26% — about $5,720 of gross profit. The owner needs $45,000 for equipment and set-up, with a quoted total cost of finance of $7,000 over two years, so the average repayment is about $2,170.
Using the true contract margin, coverage is about 2.6 times — still healthy. But had the owner also taken on a second, similar contract on the strength of the 38% figure, the working capital plan would have been short by thousands each month. Knowing the real margin on the new work is what made the difference. If your own numbers look like this, check what the contract could qualify for.
How do you find the margin on new work?
- Price it bottom-up. Cost the materials, labour hours (at the rates that will actually apply), subcontractors and delivery for a typical job or month of the new work.
- Compare with similar work. If you already do something close, use its actual margin from your books.
- Check your industry. The ATO’s small business benchmarks, released for around 100 industries, include the ratio of cost of sales to turnover. The current set covers the 2023–24 year. If your figure is far from the benchmark, find out why before you grow.
- Allow for discounts. Launch pricing, volume discounts and introductory offers all thin the margin in the early months.
What margin mistakes trip up growth plans?
A few errors come up again and again when owners build a payback case:
- Using markup as margin. The most common one, and it overstates profit every time.
- Leaving out direct labour. In service businesses, the people doing the work are usually the biggest direct cost.
- Averaging across very different work. A builder’s maintenance jobs and new-build contracts can carry completely different margins.
- Forgetting fees tied to sales. Card surcharges, marketplace commissions and platform fees all come off each sale.
- Assuming today’s supplier prices hold. Build in a buffer if input costs have been moving.
Can growth itself change your margin?
Yes, in both directions:
- Up: buying in bigger volumes cuts unit costs; new equipment reduces labour per unit; higher-value work lifts average price. See funding a new product line.
- Down: discounting to win big accounts, paying overtime to meet demand, or relying on subcontractors while you hire.
Build your payback on the margin you can prove, and treat any improvement as upside. Then run a stress test with the margin a few points lower.
Know your margin? You’re ready for the money conversation
Owners who know their gross margin — on the whole business and on the new work — make better growth decisions, and they tend to have smoother funding conversations too. Tell us about your move and the numbers behind it.
Bring your margin, your move and a rough amount. About a minute of questions, no credit check when you first reach out, and no chain of lenders receiving your details — just a specialist who reads your numbers and calls you. The more accurate your figures, the quicker we can point you to a structure your margin can comfortably carry.
Frequently asked questions
What's the difference between gross margin and markup?
Both compare price and cost, but against different bases. Margin divides the profit by the sale price; markup divides it by the cost. A product costing $60 and selling for $100 has a 40% margin but a 67% markup. Payback maths needs margin, because it tells you how much of each sales dollar is left.
How do I calculate my gross margin?
Take revenue for a period, subtract the direct costs of producing it — stock, materials, direct labour, subcontractors, freight and merchant fees tied to sales — and divide the result by revenue. Your profit and loss statement usually shows it as gross profit over total sales.
Why does gross margin matter so much for growth loans?
Because only gross profit (after the move's own running costs) is available to repay finance. A business with a 20% margin needs five dollars of extra sales to generate one dollar towards repayments; one with a 60% margin needs less than two. Margin decides how much growth it takes to pay the loan back.
How does my margin compare with other businesses in my industry?
The ATO publishes small business benchmarks for around 100 industries, including the ratio of cost of sales to turnover. Comparing your figures can show whether your margin is typical, strong or worth investigating before you grow.