Net profit margin
Learn how to calculate net profit margin, judge what’s healthy for your business and keep more of every sale.
Published Wednesday 30 September 2026
Table of contents
Net profit margin is the portion of income you get to keep
Key takeaways
- Net profit margin is the percentage of revenue you keep as profit after paying every expense, including interest and tax
- You calculate it by dividing net profit by revenue and multiplying the result by 100
- As a rule of thumb, 5% is low, 10% is healthy and 20% is high, though the right target depends on your industry
- In Indonesia, your tax regime shapes your after-tax profit, so it has a direct effect on your net profit margin
What is net profit margin?
Net profit margin (NPM) is the percentage of revenue left as profit once you’ve paid all your business costs, including interest and tax. It tells you how much of every rupiah your customers pay ends up in your pocket.
Picture a warung that takes Rp10 million in sales in a month. After paying for stock, rent, wages, loan interest and tax, the owner keeps Rp1 million. That’s a net profit margin of 10%, or Rp10,000 kept from every Rp100,000 sale.
You’ll find the figures you need on your profit and loss statement. Tracking the margin over time shows whether your business is turning more of its sales into profit.
Net profit margin formula
The formula compares your net profit with your revenue for the same period. The Corporate Finance Institute (CFI) sets out the standard net profit margin formula like this:
Net profit margin = (net profit ÷ revenue) × 100
Revenue is your total income from sales before any costs come out. Net profit is revenue minus cost of goods sold (COGS), operating expenses, interest and taxes.
Net profit is often called the bottom line because it sits on the last line of the report. For more formula variations, see this explainer on calculating net profit margin.
How to calculate net profit margin
You can work out your net profit margin in five steps using figures for one month, quarter or year. Use the same period for every figure.
- Add up your total revenue for the period.
- Subtract COGS to get your gross profit.
- Subtract operating expenses, such as rent and wages, to get your operating profit.
- Subtract loan interest and tax to get your net profit.
- Divide net profit by revenue, then multiply by 100 to get a percentage.
Here’s how that works for Roti Manis, a fictional bakery in Bandung. Its figures for one quarter are:
- Rp120 million in revenue
- Rp40 million in COGS, such as flour, butter and packaging
- Rp50 million in operating expenses, including rent, wages and electricity
- Rp2 million in loan interest
- Rp7 million in tax
Following the steps, the owner works through each line of the bakery’s accounts:
- Revenue for the quarter is Rp120 million.
- Rp120 million minus Rp40 million in COGS leaves Rp80 million in gross profit.
- Rp80 million minus Rp50 million in operating expenses leaves Rp30 million in operating profit.
- Rp30 million minus Rp2 million in interest and Rp7 million in tax leaves Rp21 million in net profit.
- Rp21 million ÷ Rp120 million × 100 gives a net profit margin of 17.5%.
So Roti Manis keeps Rp17,500 from every Rp100,000 of bread and cakes it sells. To check your own numbers quickly, enter them into this net profit margin calculator.
What is a good net profit margin?
A good net profit margin depends on your industry and how long you’ve been trading. A general benchmark gives you a starting point, and your own trend tells you the most.
A widely used rule of thumb, summarised in Brex’s guide to profit margins, treats 5% as low, 10% as healthy and 20% as high. Brex also stresses that one target won’t suit every business.
Industry averages show how wide the spread is. Aswath Damodaran’s margins by sector dataset at NYU Stern lists these average net margins for US listed companies as of January 2026:
- 25.49% for software (system and application)
- 9.37% for restaurants and dining
- 5.61% for general retail
- 1.32% for grocery and food retail
- 9.74% across the total US market
These are US listed-company averages, so treat them as a guide to how margins differ between industries. There’s no official net profit margin benchmark published for Indonesian small businesses. Your best comparisons are similar businesses in your sector and your own results over time.
So is 7% good? It sits between the low and healthy marks, which is strong for a grocery business and thin for a software company. A 20% margin reaches the high mark for most industries and is close to the software average.
Your business stage matters too, since new businesses often run lower margins while they build a customer base. To get a fuller picture, use other ways to measure business profitability alongside your margin.
Net profit margin vs gross and operating profit margin
Gross, operating and net profit margin each measure profit at a different point on your profit and loss report. Comparing all of them shows exactly where your money goes.
- Gross profit margin is gross profit divided by revenue, where gross profit is revenue minus COGS
- Operating profit margin is operating profit divided by revenue, where operating profit is gross profit minus operating expenses
- Net profit margin is net profit divided by revenue, where net profit is what’s left after interest and tax
CFI defines operating profit margin as the profit from your operations before interest and tax. That makes it useful for judging how well you run the business day to day, separate from how you finance it.
Say a clothing shop has Rp200 million in revenue and Rp80 million in COGS. Its gross profit is Rp120 million, a 60% gross margin. After Rp80 million in operating expenses, its operating profit is Rp40 million, a 20% operating margin.
The shop then pays Rp5 million in interest and Rp5 million in tax, leaving Rp30 million in net profit. That’s a 15% net profit margin.
A high gross margin with a much lower net margin points to overheads or financing costs taking a large share of profit. Start with rent, wages and interest before you change prices, and read more about how profit margins work.
How tax affects net profit margin in Indonesia
Net profit margin uses after-tax profit, so the way your business is taxed changes the final figure. In Indonesia, the regime that applies depends on your legal structure and turnover.
A limited liability company (PT) or limited partnership (CV) pays corporate income tax, known as PPh Badan. The standard rate is 22% under the Tax Harmonisation Law (UU HPP).
Companies with turnover up to Rp50 billion get a 50% rate cut under Pasal 31E of the Income Tax Law. That means an effective 11% on the share of taxable profit tied to the first Rp4.8 billion of turnover. The Directorate General of Taxes (DJP) explains these corporate tax tiers, including the full 22% rate above Rp50 billion.
Individuals, one-person companies (Perseroan Perorangan) and cooperatives can instead pay a 0.5% final tax on turnover up to Rp4.8 billion a year. Under Government Regulation (PP) 20/2026, in force from 22 April 2026, individuals and one-person companies can use it with no time limit. Cooperatives can use it for a maximum of four years.
Newly registered PT, CV and firma businesses can’t use the final tax and pay PPh Badan instead. Businesses already on the scheme keep transitional rights until their earlier time limit ends, as DJP’s summary of the PP 20/2026 changes explains.
Individuals on the final tax also pay no tax on their first Rp500 million of turnover each year, as PwC’s Indonesia tax summary notes. For example, an individual with Rp1 billion in turnover pays 0.5% on Rp500 million, or Rp2.5 million.
Whichever regime you’re on, calculate net profit margin after tax. Because the final tax is charged on turnover, you pay it even in a period when you make a loss, which pushes your margin lower. Tax rules can change, so confirm your position with a tax adviser before you set prices or budgets around them.
Factors that affect net profit margin
Your margin moves whenever revenue or any cost line changes. These are the factors that most often shift it:
- Changes in sales volume, including seasonal peaks and quiet months
- Rising COGS, such as higher prices for ingredients or stock
- Operating expenses like rent, utilities and labour costs
- Pricing decisions, including how often you offer discounts
- Loan interest and the tax regime your business falls under
- Exchange rates, which change the rupiah cost of imported inputs
Exchange rates deserve a close eye if you buy from overseas. When the rupiah weakens, imported flour, fabric or equipment costs more, and your margin shrinks unless you adjust prices.
How to improve your net profit margin
Small, regular changes to prices and costs add up over a year. Work through these steps, then explore more ways to increase profits once you’ve covered the basics.
- Review your pricing at least once a year against your costs and what similar businesses charge.
- Go through your expenses every quarter and cut or renegotiate costs that don’t pay their way.
- Increase your average sale value with bundles, add-ons or larger pack sizes.
- Negotiate with suppliers for bulk discounts or better payment terms.
- Automate admin tasks like bank reconciliation and invoicing with online accounting software to free up your time.
- Check your profit and loss report every month so you spot a slipping margin early.
- Keep existing customers coming back with loyalty offers and consistent service.
Limitations of net profit margin
Net profit margin is a useful headline figure, and it works best alongside your other reports. Keep these limits in mind when you read it:
- Cash timing sits outside the ratio, so a profitable quarter can still leave you short if customers pay late
- One-off items, such as selling equipment or a large repair bill, can push a single period’s margin up or down
- Early-stage businesses often show low or negative margins while they invest in stock and marketing
- Comparisons hold up best like for like, with businesses of a similar size in the same industry over the same period
Track your net profit margin with Xero
Knowing your net profit margin helps you set prices and plan spending with confidence. The more often you check it, the sooner you can act on a change.
Xero’s financial reports turn your revenue and expenses into an easy-to-read profit and loss view. Automated bank feeds keep the numbers up to date, and you can work on them with your accountant or bookkeeper in real time.
Start tracking your margin month by month when you get one month free on a Xero plan.
FAQs on net profit margin
Here are quick answers to common questions about net profit margin.
Is 20% a good net profit margin?
Yes, 20% is a strong margin for most small businesses. Check it isn’t boosted by a one-off gain or by not paying yourself a salary, since either can make it hard to repeat.
Is 7% a good net profit margin?
It can be, depending on your industry and direction of travel. A 7% margin that’s climbing from 4% is a better sign than one that’s slipping from 10%.
Can net profit margin be negative?
Yes, a negative margin means your costs were higher than your revenue for the period. For example, a Rp6 million loss on Rp100 million in revenue gives a net profit margin of minus 6%.
How often should you check your net profit margin?
Check it monthly, and again after any price change or new supplier contract. If your sales peak around Ramadan and Lebaran, compare each month with the same month last year.
Should I use before-tax or after-tax net profit?
Use after-tax profit for net profit margin, since that’s what the business keeps. A before-tax margin is still handy for comparing businesses on different tax regimes, such as the 0.5% final tax and PPh Badan.
Related terms
Learn more about net profit margin
Handy resources
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Margin calculator
Calculate your gross profit margin with this simple calculator to check you’re hitting your targets.
Financial reporting
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.