How to calculate profit margin

Profit margin (calculation)

Profit margin is profit divided by revenue, times 100. There is a gross profit margin (bigger) and a net profit margin (smaller).

Gross profit margin formula shows gross profit divided by sales revenue, times 100, equals gross profit margin.

Gross profit margin shows what portion of sales income you can keep in the business

Net profit margin formula shows that net profit divided by sales revenue, times 100, equals net profit margin.

How to calculate profit margins

Example of profit margin calculations

Let’s say your business makes $20,000 by cleaning offices. It costs you $8000 to provide those services, so your gross profit is $12,000. You spend another $3000 on operating expenses and $4000 on taxes, so your net profit is $5000.

Here’s how to work out your margins.

Example shows $12,000 divided by $20,000, times 100, equals 60 percent gross profit margin

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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.