What is a good profit margin for a small business?

Short answer: there is no single good profit margin, because it depends on your trade and on how you pay yourself. A builder or a café can be healthy on a net margin that would worry a consultant. A better test is the margin your business needs: enough net profit to pay you a fair wage, set aside the tax, and replace equipment, all divided by your sales. If your net margin (net profit ÷ sales × 100) is at or above that number and holding steady year on year, it is good for your business. Then check your trade’s ranges (in Australia the ATO publishes them free) and your own history, not an average from the internet.

Gross margin and net margin are different questions

Margin	How to work it out	What it tells you
Gross margin	(Sales − cost of sales) ÷ sales × 100	Whether your prices cover what each job or product costs you
Net margin	Net profit ÷ sales × 100	Whether the whole business, overheads included, makes money

Both use sales excluding GST or VAT (turnover vs profit explains why). A good gross margin with a poor net margin means overheads are the problem; a poor gross margin means prices or direct costs are. “Profit margin” on its own usually means net margin, so check which one any figure you read is using.

Work out the margin your business needs

1. A fair wage for you. What you would have to pay someone else to do your job, or what you need to live on, whichever is higher.
2. Tax on the profit. Your accountant can give you a rough figure; how much to set aside for tax shows the method.
3. Reinvestment. Vehicles, tools and equipment wear out. Divide what they cost by how many years they last.
4. Add the three and divide by a year’s sales. That is your required net margin, if your wage is not already in the Profit and Loss. If it is (a company paying you a salary), leave step 1 out.

A worked example: a landscaper in Melbourne

These figures are made up and exclude GST. A sole trader landscaper with two staff:

Line	Amount
Sales	420,000
Plants, materials and tip fees (cost of sales)	168,000
Gross profit	252,000 (60% gross margin)
Staff wages and super	115,000
Vehicles and fuel	22,000
Insurance, yard rent and other overheads	25,000
Net profit	90,000 (21.4% net margin)

Is 21.4% good?

1. What the business needs. The owner wants $80,000 a year to live on, their accountant says to put about $20,000 aside for income tax, and the business needs a $45,000 ute every three years, $15,000 a year. That is $115,000, or 27.4% of $420,000. A 21.4% margin is short by $25,000 a year, even though the Profit and Loss shows a healthy-looking profit.
2. The owner’s pay changes the number. A sole trader’s net profit is their pay, because drawings are not an expense. Run the same business as a company that pays the owner an $80,000 salary plus 12% super through the Profit and Loss, and net profit is $400, a 0.1% margin. Same business, same cash: compare margins only with businesses that pay their owners the same way. How much can I pay myself covers drawings, wages and dividends.
3. Closing the gap. A 6% price rise on the same jobs adds $25,200. So would cutting cost of sales from 40% to 34% of sales. Or split it: 3% on prices ($12,600) and three points off materials ($12,600). The price increase calculator shows how many customers you could lose before a rise stops paying, and fixed and variable costs shows why extra jobs at the same overheads lift the margin fast. If you charge by the hour, the charge-out rate calculator turns the wage you want, your overheads and your billable hours into the rate that hits your margin; the overhead rate calculator shows what share of sales and gross profit your overheads take.

How to compare with your trade

• Australia: the ATO’s free small business benchmarks give ranges for about 100 industries, split by turnover band. The two main ratios are cost of sales to turnover and total expenses to turnover. Total expenses there leave out payments to you and your family, so 100% minus that ratio is roughly your margin before paying yourself. The landscaper’s total expenses are $330,000, 78.6% of turnover. The ATO also uses these ranges to spot businesses that may be under-reporting, so a result far outside them is worth asking your accountant about.
• New Zealand and the UK: there is no free official equivalent we know of. Industry associations, your bank and your accountant are the best sources for typical margins in your trade.
• Figures found online often mix gross, net, operating and EBITDA margins and include large companies. Treat them as rough. Operating profit margin explains the differences.
• Your own history is the most reliable comparison. A net margin that holds or rises as sales grow is a good sign; one that falls while sales grow means costs are growing faster than the work.

Where to find your margins in Xero

1. Open Accounting › Reports › Profit and Loss for the last 12 months (one month can swing with a single large invoice or bill).
2. Gross margin: Gross Profit ÷ Total Trading Income × 100. Net margin: Net Profit ÷ Total Trading Income × 100. The Xero gross profit margin guide shows how to add the percentage as a formula row, or read it month by month in the Executive Summary.
3. Compare with the same 12 months a year earlier. How to know if your business is doing well adds four more checks, and the free net profit calculator works the margin out from figures you type in.

Common mistakes

• Comparing with a business that pays its owner differently. A sole trader’s margin includes the owner’s pay; a company’s often does not.
• Judging one month. Seasonal work, a quarterly bill or a big invoice can move a month’s margin by many points. Use 12 months.
• Counting GST or VAT in sales. It is not yours, and it makes the margin look lower than it is.
• Chasing sales instead of margin. More turnover at a lower margin can leave less profit (why did my profit drop).
• Treating a good margin as cash. Profit is not money in the bank until customers pay (profit but no cash).

Common questions

What is a good profit margin for a small business? There is no single figure: it depends on the trade and on whether the owner’s pay is already in the costs. A good margin is one that covers a fair wage for you, the tax on the profit and replacing equipment, and that holds steady or rises year on year.

Is a 20% profit margin good? It can be. For a sole trader, a 20% net margin has to pay the owner, so it may still be too low; the landscaper above needs 27.4%. For a company that already pays its owner a salary, 20% left over after that is strong in most trades.

What is the difference between gross and net profit margin? Gross margin takes off only the direct cost of what you sold, so it shows whether prices cover each job. Net margin takes off every cost, overheads included, so it shows whether the business as a whole makes money.

How do I calculate my profit margin in Xero? Run the Profit and Loss for the last 12 months and divide Net Profit by Total Trading Income, then multiply by 100. For gross margin, divide Gross Profit by Total Trading Income instead.

Where can I find average profit margins for my industry? In Australia, the ATO’s small business benchmarks give ranges by industry and turnover band. In New Zealand and the UK, ask your accountant, your bank or your industry association. Check whether a figure is gross, net or EBITDA before comparing.

Why is my profit margin going down when sales are going up? Usually because costs are growing faster than sales: discounts to win work, supplier prices rising, or new staff and overheads taken on ahead of the work. Compare each cost as a percentage of sales for both years to find which one moved.

See your margin every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday, with a 24-month dashboard behind it. It covers the cash in the bank against the end of last month, sales and profit against last month and the same month last year, money owed to you that is past due, and bills due in the next two weeks against your cash. It does not compare you with industry benchmarks or work out tax. It asks Xero for read-only access, and there is a 14-day free trial with no card.