In plain English
It shows how much of each sales dollar remains as profit after all costs.
Compare it over time.
Why it matters
Net margin turns the bottom line into a percentage, which makes it possible to compare a slow year with a busy one. Sales can rise while net margin falls, a sign that costs are growing faster than revenue. Buyers and lenders use it to judge how efficiently the business turns sales into profit.
Because it uses net income, every miscoded expense or missing transaction flows straight into it.
Worked example
Net income of $24,000 on revenue of $200,000 is a 12% net margin ($24,000 / $200,000), meaning 12 cents of each sales dollar is left as profit.
How to handle it
- Run a profit and loss for the period you want to measure.
- Divide net income by total revenue and express the result as a percentage.
- Calculate it the same way each month or quarter and record it in a spreadsheet.
- When it moves, compare the income statement line by line with the prior period to find which costs changed.
Common mistakes
- Comparing net margin with a business that pays its owners differently, which makes the comparison misleading.
- Calculating it on a period with a large one-time gain or loss and treating that as normal.
- Using deposits as revenue instead of sales from the income statement, which skews the percentage.
Not the same as: Gross margin
Gross margin only subtracts direct costs of sales. Net margin subtracts every expense, so it is always lower and reflects overhead as well. See Gross margin.
Go deeper
- Financial Ratios Small Business Owners Should Know: Learn the handful of financial ratios that matter for small businesses: margins, current ratio, debt, collection days, and how to read them.
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Related terms
- Operating expenses: The regular costs of running a business that are not part of cost of goods sold.
- Owner's draw: Money a sole proprietor or partner takes out of the business for personal use.
- Net income: What is left of revenue after all expenses, including cost of goods sold and taxes where recorded.
Common questions
What is a net margin?
Net income as a percentage of revenue.
Can you give an example of net margin?
Net income of $24,000 on revenue of $200,000 is a 12% net margin ($24,000 / $200,000), meaning 12 cents of each sales dollar is left as profit.
Can net margin be negative?
Yes. If total expenses exceed revenue, net income is a loss and the margin is negative.
Should owner pay be included before calculating net margin?
It depends on your entity type and how you pay yourself. For comparisons, many owners also look at margin before owner compensation so different setups can be compared fairly.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.