Net Margin Explained

What net margin means

Net margin is net profit divided by revenue, shown as a percentage. It's the most honest one-number summary of how efficient your business really is.

Why it matters for small business

Two shops might both sell $200,000 a year. One ends up with $30,000 net profit (15% margin); the other with $4,000 (2%). The first business has cushion to invest and survive a slow month — the second is one bad month away from trouble.

Simple formula

Practical example

A small online shop has $20,000 revenue and $1,800 net profit.

For every dollar of sales, 9 cents stays in the business after all costs and tax.

Practical interpretation

• Higher net margin = more resilience and more room to reinvest.
• Falling net margin while revenue grows usually points to rising costs or under-pricing.
• Compare your net margin year-over-year, not just to other industries.

Common mistakes

• Forgetting owner pay. If you don't include a realistic salary for yourself, net margin will look better than it really is.
• Mixing one-off and recurring costs. A big one-time expense can distort the number — look at trends, not single months.