{"id":1398,"date":"2026-07-12T16:13:27","date_gmt":"2026-07-12T23:13:27","guid":{"rendered":"https:\/\/www.karlongroup.com\/blog\/?p=1398"},"modified":"2026-07-12T16:14:27","modified_gmt":"2026-07-12T23:14:27","slug":"financial-fluency-for-founders-navigating-margin-jargon","status":"publish","type":"post","link":"https:\/\/www.karlongroup.com\/blog\/2026\/07\/12\/financial-fluency-for-founders-navigating-margin-jargon\/","title":{"rendered":"Financial Fluency for Founders: Navigating Margin Jargon"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">First-time founders: What\u2019s the difference between gross margin, contribution margin and EBITDA margin? Which one(s) should you care about?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Margin jargon can be confusing. There\u2019s a lot of terminology. To make matters worse, two of these margins, GM and CM, aren\u2019t well-defined.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Here\u2019s a practical guide:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Gross margin:\u00a0<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If designed well, GM is meant to answer the question: what\u2019s my margin on the next \u2018unit\u2019 sold?<\/li>\n\n\n\n<li>To answer this question, best to include all purely variable costs incurred as a consequence of selling another unit of your product.<\/li>\n\n\n\n<li>If you\u2019re in software, include cloud infrastructure costs, customer support and onboarding costs, amortized software development costs, and payment processing fees.<\/li>\n\n\n\n<li>If you\u2019re in e-commerce, include product costs, inbound and outbound freight, and payment processing fees.<\/li>\n\n\n\n<li>In reality, a lot of companies play games with GM. They <em>exclude<\/em> certain variable costs to inflate it. This only limits the usefulness of this KPI as a tool to understand the business. Avoid the temptation. Include more variable costs versus less.<\/li>\n\n\n\n<li>What does GAAP say? GAAP has certain rules around COGS, but only for inventory. For this reason, GM can be manipulated fairly easily.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Contribution margin:<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>CM is meant to answer a different question: what margin do I earn from my growth engine?\u00a0<\/li>\n\n\n\n<li>CM should include one additional layer of costs: sales and marketing. I recommend including the costs of your sales team and performance marketing. You may exclude brand marketing, depending on how you define it and how fixed it really is.<\/li>\n\n\n\n<li>What does GAAP say? CM is not a GAAP concept. No accounting body defines it, no auditor checks it, and no two companies calculate it exactly the same way.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>EBITDA margin:<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>EM tells you how profitable your business is, including all your fixed operational costs.<\/li>\n\n\n\n<li>EBITDA is not a GAAP metric, but it is well-defined. The name itself is the definition: Earnings Before Interest, Taxes, Depreciation and Amortization.\u00a0<\/li>\n\n\n\n<li>Since EM is clearly defined, it\u2019s hard to play games with it.<\/li>\n\n\n\n<li>Many companies include an \u2018Adjusted EBITDA\u2019 figure, adding back non-recurring, non-cash and non-core expenses. This can be a useful way to track underlying EBITDA trends, but it\u2019s also a great way to game the number, no surprise. If you can avoid this metric, I recommend you do.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If you\u2019re a founder, take the time to ensure your margins are set up logically. Once your finance team has sharpened the tool, you can use it to understand your business.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u2192 Gross margin: is my product economically profitable<br>\u2192 Contribution margin: is my growth engine working<br>\u2192 EBITDA margin: am I generating profit above and beyond my fixed costs<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>About the Author:<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Karsten Loose is co-founder and Managing Partner at&nbsp;<a href=\"https:\/\/www.karlongroup.com\/\">Karlon Group<\/a>, a fractional finance and accounting firm that helps companies build, scale, and optimize their finance and accounting functions. Karlon Group works with companies across SaaS, consumer, manufacturing, and technology, offering a full suite of finance and accounting support tailored to each client\u2019s changing needs.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>First-time founders: What\u2019s the difference between gross margin, contribution margin and EBITDA margin? Which one(s) should you care about? Margin jargon can be confusing. There\u2019s a lot of terminology. To make matters worse, two of these margins, GM and CM, aren\u2019t well-defined. Here\u2019s a practical guide: Gross margin:\u00a0 Contribution margin: EBITDA margin: If you\u2019re a [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[147,170,164,191,188,195,189,151,148,192,163,197,193,190,110,196,155,194],"class_list":["post-1398","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-adjusted-ebitda","tag-cogs","tag-contribution-margin","tag-cost-of-revenue","tag-ebitda-margin","tag-finance-basics-for-founders","tag-financial-fluency-for-founders","tag-founder-finance","tag-fractional-cfo","tag-gaap","tag-gross-margin","tag-margin-analysis","tag-profitability-metrics","tag-saas-metrics","tag-startup-finance","tag-startup-kpis","tag-unit-economics","tag-venture-backed-startups"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - 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