What is net profit margin? Definition, formula and how to calculate it

Published Thursday 23 July 2026

Table of contents

• What is net profit margin?
• Net profit margin formula
• How to calculate net profit margin
• Net profit margin vs gross profit margin
• What is a good net profit margin?
• How to improve your net profit margin
• Track your net profit margin with Xero
• FAQs on net profit margin

Key takeaways

• Net profit margin is the percentage of revenue left after subtracting all expenses, including cost of goods sold (COGS), operating costs, interest and taxes
• You can calculate it by dividing net profit by total revenue, then multiplying by 100
• A net profit margin of around 10% is generally considered healthy for small businesses, though this varies by industry
• Regularly reviewing your net profit margin helps you spot trends, reduce unnecessary costs and make more confident pricing decisions

What is net profit margin?

Net profit margin is the percentage of your total revenue that remains as profit after all expenses have been deducted. It's a widely used measure of your business's overall financial health.

Unlike gross profit margin, which only accounts for direct production costs, net profit margin factors in every expense your business incurs. This includes the cost of goods sold, operating expenses like rent and wages, interest on loans and tax obligations.

For small business owners, tracking your net profit margin over time gives you a clear picture of whether your business is becoming more or less profitable. A rising margin means you're keeping more of each dollar earned, while a falling margin signals that costs may be growing faster than revenue. Learn more about how to measure profitability.

Net profit margin formula

The net profit margin formula is straightforward. You divide your net profit by your total revenue, then multiply by 100 to express it as a percentage.

Net profit margin = (net profit / total revenue) x 100

To use this formula, you need to understand each component.

• Total revenue: all income your business earns from sales before any deductions
• Cost of goods sold (COGS): direct costs of producing your goods or delivering your services, such as materials, manufacturing and direct labour
• Operating expenses: ongoing costs of running your business, including rent, utilities, wages, marketing and insurance
• Interest: payments on business loans or credit facilities
• Taxes: income tax and other tax obligations
• Net profit: the amount left after subtracting COGS, operating expenses, interest and taxes from total revenue

How to calculate net profit margin

Calculating your net profit margin takes just a few steps. Here's how to work it out using a practical example for a fictional Australian small business, Coastal Coffee Co.

1. Add up your total revenue for the period. Coastal Coffee Co. earned $500,000 in revenue over the financial year.
2. Calculate your total expenses. COGS came to $200,000, operating expenses were $180,000, interest on a business loan was $10,000 and tax was $22,000. Total expenses: $412,000.
3. Subtract total expenses from total revenue to find net profit. $500,000 - $412,000 = $88,000 net profit.
4. Divide net profit by total revenue. $88,000 / $500,000 = 0.176.
5. Multiply by 100 to get the percentage. 0.176 x 100 = 17.6% net profit margin.

This means Coastal Coffee Co. keeps 17.6 cents of every dollar earned as profit after all expenses. You can also use Xero's free net profit margin calculator to run the numbers quickly.

Net profit margin vs gross profit margin

Net profit margin and gross profit margin both measure profitability, but they tell you different things about your business.

Gross profit margin only deducts the direct costs of producing your goods or services (COGS) from revenue. It shows how efficiently you're producing or sourcing what you sell. If your gross margin is shrinking, it could mean your supplier costs are rising or your pricing isn't keeping pace.

Net profit margin goes further by subtracting all expenses, including operating costs, interest and taxes. It gives you a more complete picture of how much profit your business actually retains. A healthy gross margin paired with a low net margin often points to high overheads or operating expenses that need attention.

There's also operating profit margin, which sits between the 2. It deducts COGS and operating expenses but excludes interest and taxes. This is useful for assessing how well your core business operations perform, separate from financing and tax considerations.

What is a good net profit margin?

A "good" net profit margin depends on your industry, business model and stage of growth. However, some general benchmarks can help you gauge where you stand.

• Below 5%: generally considered low, and may indicate your business is vulnerable to cost increases or revenue dips
• Around 10%: typically seen as healthy for most small businesses
• Above 20%: considered strong, and is more common in industries with lower overhead costs, such as consulting or digital services

Industry variation plays a big role. Retail and hospitality businesses in Australia often operate on thinner margins (3% to 9%), while professional services and technology businesses may achieve margins of 15% or higher. Comparing your margin to others in your specific industry gives you a more meaningful benchmark than a general figure alone.

Rather than fixating on a single number, focus on the trend. If your net profit margin is improving over time, you're heading in the right direction. If it's declining, it's worth investigating which costs are growing and whether your pricing still works.

How to improve your net profit margin

Improving your net profit margin comes down to either increasing revenue, reducing expenses or both. Here are practical strategies that work for small businesses.

• Review your pricing: make sure your prices reflect your current costs and the value you deliver. Even small price adjustments can have a noticeable effect on your margin
• Cut unnecessary expenses: audit your recurring costs regularly. Cancel subscriptions you don't use, renegotiate supplier contracts and look for more cost-effective alternatives
• Improve operational efficiency: streamline your workflows and automate repetitive tasks like invoicing, bank reconciliation and expense tracking. This frees up time and reduces the cost of manual admin
• Manage your product or service mix: focus on your most profitable offerings. If certain products or services consistently deliver lower margins, consider whether they're worth keeping
• Reduce waste and rework: identify where you're losing money to errors, returns or inefficiency, then put processes in place to minimise them
• Monitor your margin regularly: don't wait until the end of the financial year to check your profitability. Reviewing your profit and loss report monthly or quarterly helps you catch issues early

Track your net profit margin with Xero

Keeping a close eye on your net profit margin is easier when you have the right tools. Xero's accounting software generates profit and loss reports that break down your revenue and expenses clearly, so you can see your net profit margin at a glance.

With real-time data and customisable reporting, you can track how your margin changes over time and spot trends before they become problems. Automation handles routine tasks like bank reconciliation and invoice reminders, giving you more time to focus on growing your business. Get one month free.

FAQs on net profit margin

Here are answers to some frequently asked questions about net profit margin.

What is net profit margin in simple terms?

Net profit margin is the percentage of your revenue that's left as profit after paying all your business expenses. It tells you how much of each dollar earned you actually get to keep.

How is net profit margin different from gross profit margin?

Gross profit margin only subtracts the direct costs of producing your goods or services. Net profit margin subtracts all expenses, including operating costs, interest and taxes, giving you a fuller picture of your profitability.

Can net profit margin be negative?

Yes, a negative net profit margin means your total expenses exceed your revenue, so your business is operating at a loss. This can happen during periods of heavy investment or unexpected cost increases.

How often should you check your net profit margin?

Reviewing your net profit margin monthly or quarterly is a good practice for small businesses. Regular checks help you spot changes early and take action before small issues become bigger problems.

Does net profit margin vary by industry?

Yes, net profit margins vary significantly across industries. Service-based businesses often have higher margins than retail or hospitality, where overhead and material costs tend to be greater.