What is the first step in calculating gross margin?

The first step in calculating gross margin is to determine total merchandise sales. Gross margin is derived from the formula that subtracts the cost of goods sold (COGS) from total sales revenue. The total sales figure, which represents all income generated from selling goods or services, is essential before any deductions can be made for costs. By identifying the total sales amount first, businesses can then accurately input this figure into the gross margin calculation and assess how much profit is retained from sales after accounting for the costs directly tied to the products sold. This highlights the importance of understanding revenue generation as a foundational element of financial analysis.