--- title: "What Is Net Margin? Definition & Example | MCC Solutions" description: "Net income as a percentage of revenue. A worked example, how it differs from gross margin, common mistakes and how to handle it." url: "https://mcc-solutionsnj.com/bookkeeping/glossary/net-margin" --- Bookkeeping glossary # What is net margin? Net income as a percentage of revenue. By [Matthew Coleman](/about), MCC Solutions [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## In plain English It shows how much of each sales dollar remains as profit after all costs. Want a second pair of eyes on your books? [A free bookkeeping health check](/bookkeeping/health-check). 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](/bookkeeping/glossary/gross-margin). ## Go deeper - [Financial Ratios Small Business Owners Should Know](/bookkeeping/guides/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. ## Try it [Use the related free tool](/bookkeeping/operating-margin-calculator). ## Related terms - [Operating expenses](/bookkeeping/glossary/operating-expenses): The regular costs of running a business that are not part of cost of goods sold. - [Owner's draw](/bookkeeping/glossary/owner-draw): Money a sole proprietor or partner takes out of the business for personal use. - [Net income](/bookkeeping/glossary/net-income): What is left of revenue after all expenses, including cost of goods sold and taxes where recorded. ## Common questions **What is 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. Need help? [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [Full glossary](/bookkeeping/glossary) Do it yourself ### Solopreneur Money Toolkit Estimate the tax, compare the offer, keep the calendar and run the business from one organized set of files. [See what's inside ($99)](/toolkits/solopreneur-money-toolkit)14-day full refund [![Cover of Bookkeeping Fundamentals (ebook) by Matthew Colt](/img/toolkits/bookkeeping-fundamentals-ebook/cover.webp)](/toolkits/bookkeeping-fundamentals-ebook) From the bookshelf ### Bookkeeping Fundamentals A college-level bookkeeping course, without the tuition. By Matthew Colt, $9.99 as an ebook (EPUB and PDF). [See the book](/toolkits/bookkeeping-fundamentals-ebook) [Read the first pages free](/toolkits/bookkeeping-fundamentals-ebook#free-starter) Tallyfinch ### Books you keep on your own computer Tallyfinch does invoices, bills, bank import, reconciliation and the main reports, in a file you own. $99 once, then $5 a month for updates; the app keeps working if you stop the plan. It does not do payroll or sales tax filing. The free download records up to 60 entries. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software) ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)