Glossary · Finance
What is Profit Margin?
Definition
Profit margin is the percentage of revenue that becomes profit, showing how much you keep from each dollar of sales.
Net profit margin % = net profit ÷ revenue × 100
Why it matters
You can calculate margin at different levels: gross, operating, or net. Net profit margin is the one most founders mean, because it reflects everything left after all costs.
If a food truck earns $12,000 in a month and keeps $1,800 after food, labor, fuel, permits, and fees, its net profit margin is 1,800 divided by 12,000, or 15 percent. Raising prices by just 5 percent with the same volume would add $600 and lift margin to about 19 percent.
Small changes in margin matter a lot at small scale. A business with a 5 percent margin has far less cushion for a slow month than one with a 25 percent margin.
Common mistakes
- !Chasing higher revenue while margin shrinks, so working harder yields the same or less money.
- !Comparing your margin to a different industry with very different cost structures.
Frequently asked questions
What is Profit Margin?
Profit margin is the percentage of revenue that becomes profit, showing how much you keep from each dollar of sales.
How do you calculate Profit Margin?
Net profit margin % = net profit ÷ revenue × 100
What mistakes do beginners make with Profit Margin?
Chasing higher revenue while margin shrinks, so working harder yields the same or less money. Comparing your margin to a different industry with very different cost structures.
Related terms