The three profit margins
Gross margin shows how much you keep after the direct cost of what you sell. Operating margin also subtracts overhead such as rent, wages and marketing. Net margin is what remains after taxes, the bottom line.
Operating margin = (Gross profit − Operating expenses) ÷ Revenue
Net margin = (Operating profit − Tax) ÷ Revenue
Example
With $100,000 revenue, $40,000 COGS and $30,000 operating expenses, gross margin is 60%, operating margin is 30%, and after 21% tax net profit is $23,700, a 23.7% net margin.
What's a good profit margin?
It varies widely by industry. Grocery stores often net 1–3%, restaurants 3–6%, while software and professional services can exceed 20%. Compare yourself to businesses in your own industry and track the trend over time.
FAQs
What is the difference between gross and net margin?
Gross margin only subtracts the direct cost of goods sold. Net margin subtracts all expenses, interest and taxes.
Which tax rate should I use?
C corporations pay a 21% federal rate plus state tax. For sole proprietors and pass-through entities, profit is taxed on the owner's return, so you can enter 0 to see pre-tax margin.
Can margin be negative?
Yes. A negative margin means the business is losing money at that level.