Net profit margin
Net profit margin is the share of income you keep after all expenses and taxes. Here's how to work yours out.
Published Thursday 23 July 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 total income you get to keep after all expenses and taxes are paid.
- You work it out by dividing net profit by revenue, then multiplying by 100.
- A good net profit margin depends on your industry, so compare your result to your own trend and to similar businesses.
- You can lift your margin by raising prices, trimming costs and running your business more efficiently.
What is net profit margin?
Net profit margin is the percentage of total income you get to keep after all expenses and taxes are paid. It tells you how much of every dollar of revenue turns into profit.
A higher margin means more of your income stays in the business. A lower margin means costs are eating into what you earn, so it's a quick way to check how healthy your profit really is.
Net profit margin formula
You can calculate the figure with one short formula. Net profit margin = (net profit ÷ revenue) x 100.
Each input is straightforward:
- Net profit: revenue minus all your expenses, including cost of goods sold, operating costs, interest and tax
- Revenue: the total income your business earns from sales before any expenses are taken out
- x 100: turns the result into a percentage so it's easy to read and compare
How to calculate net profit margin
Once you have your revenue and expenses to hand, the calculation takes a few simple steps. Here's a worked example for a business with $200,000 in revenue.
- Find your total revenue for the period. In this example, revenue is $200,000.
- Add up all your expenses, then subtract them from revenue. That leaves a net profit of $30,000.
- Divide net profit by revenue: $30,000 ÷ $200,000 = 0.15.
- Multiply by 100 to get a net profit margin of 15%.
So this business keeps 15 cents of every dollar it earns. You can also let the net profit margin calculator do the maths for you.
What is a good net profit margin?
There's no single number that counts as good, because margins vary widely from one industry to the next. A busy hospitality venue and a software business can both be doing well on very different margins.
Two comparisons are more useful than any benchmark. Track your margin over time to see whether it's rising or slipping, and compare it against similar businesses in your industry to judge where you stand.
Gross profit, operating profit and net profit margin
These three measures often get mixed up, but each strips out a different set of costs. Working through them in order shows how much profit is left at each stage.
- Gross profit: revenue minus your cost of goods sold, showing what's left before running costs
- Operating profit: gross profit minus operating expenses like rent, wages and marketing, before interest and tax
- Net profit: revenue minus every expense, including cost of goods sold, operating costs, interest and tax
Net profit margin uses that final figure, so it's the fullest picture of what your business actually keeps.
How to improve your net profit margin
Improving your margin comes down to earning more from each sale or spending less to make it. A few practical levers can help.
- Raise your prices where the market allows, so more of each sale becomes profit
- Cut costs by reviewing suppliers, subscriptions and other outgoings for savings
- Improve efficiency by automating manual admin and reducing wasted time
- Focus on your most profitable products or services and scale them back where margins are thin
For more ways to trim outgoings, browse these business cost-saving ideas.
See your profit margin clearly with Xero
Working out your net profit margin is much easier when your income and expenses sit in one place. Xero brings your finances together and produces clear financial reports, so you can see how your margin is tracking without digging through spreadsheets.
With real-time numbers in front of you, you can spot trends early and make confident decisions about pricing and costs. Ready to get started? Get one month free.
FAQs on net profit margin
Here are answers to some frequently asked questions about net profit margin.
How do you calculate net profit margin?
Divide your net profit by your revenue, then multiply by 100 to get a percentage. Net profit is your revenue after all expenses and taxes are paid.
What's the difference between gross and net profit margin?
Gross profit margin only takes out the cost of goods sold, while net profit margin takes out every expense, including operating costs, interest and tax. Net profit margin is the lower and more complete figure.
Is a higher net profit margin always better?
A higher margin usually means you keep more of what you earn, which is a healthy sign. What counts as strong still depends on your industry, so compare against similar businesses.
Can net profit margin be negative?
Yes, if your total expenses are greater than your revenue, your net profit margin is negative. That points to a loss for the period and a need to review pricing or costs.
Related terms
Learn more about net profit margin
Handy resources
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Margin calculator
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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.