What Is Net Profit Margin?
By BRIX Editorial Team · Updated
Net profit margin is the percentage of revenue a business keeps after paying every cost: job costs, overhead, and usually interest and taxes. Net profit margin % = Net profit ÷ Revenue × 100. An HVAC company with $1,800,000 in revenue and $162,000 left after job costs and overhead has a 9% net margin before taxes.
Key takeaways
- Net profit margin = net profit ÷ revenue. It's the bottom line of your profit and loss statement shown as a percentage.
- Gross margin pays for the job. Net margin is what's left after the job and the business (overhead) are both paid for.
- Say whether you mean before or after taxes. Most owners track pre-tax net, because tax depends on entity type and personal situation.
- If you don't pay yourself a market wage on the books, your net margin is overstated. Your labor isn't free.
- Net margin is set by three things you control: price, direct job costs and overhead. Work backward from the net you want.
How does net profit margin work?
Net profit margin shows how many cents of every revenue dollar the business actually keeps. Start with revenue, subtract cost of goods sold to get gross profit, subtract overhead to get operating profit, then subtract interest and, if you want the after-tax figure, income taxes. Divide what's left by revenue.
Net profit = Revenue − COGS − Overhead − Interest − Taxes | Net profit margin % = Net profit ÷ Revenue × 100
- Revenue
- everything you billed for the period, before sales tax
- COGS
- direct job costs: materials, burdened field labor, subcontractors, permits, disposal
- Overhead
- the cost of running the business: office staff, rent, trucks, insurance, software, marketing, owner's salary
- Taxes
- leave out for pre-tax net margin, which is easier to compare year to year
What's the difference between gross and net profit margin?
Gross profit margin subtracts only the direct cost of the jobs; net profit margin subtracts overhead as well. Gross margin answers "do my prices cover the work?" Net margin answers "does the business make money?" A shop can have a healthy gross margin and still lose money if overhead is bigger than gross profit.
| Line | Amount | % of revenue |
|---|---|---|
| Revenue | $1,800,000 | 100% |
| Cost of goods sold | $1,026,000 | 57% |
| Gross profit | $774,000 | 43% (gross margin) |
| Overhead | $612,000 | 34% |
| Net profit before taxes | $162,000 | 9% (net margin) |
How much net profit does one job make?
A single job's net profit is its price minus its direct costs minus its share of overhead. Most owners skip the overhead share, which is how a job with a respectable markup ends up making almost nothing.
What is a good net profit margin for a contractor?
A good net profit margin is one that pays you a fair return for the risk of owning the business, on top of a market salary for the work you do in it. There's no reliable public average for small trades shops, so set a target deliberately: decide the profit dollars you want, divide by expected revenue, and price so your gross margin covers overhead plus that net.
- 1
Pay yourself on the books first.
Put a market salary for your role in overhead. Profit is what's left after that, not instead of it.
- 2
Pick a profit goal in dollars.
Think about what the business needs: a cash cushion for slow months, a truck replacement fund, debt payoff, and a return on the money you've put in.
- 3
Turn it into a margin.
Divide the profit goal by expected revenue. $150,000 on $1,500,000 of revenue is a 10% net margin target.
- 4
Add overhead to get your gross margin target.
If overhead is 32% of revenue, every job needs a 42% gross margin on average. Convert that to a markup with the markup vs. margin table.
Net profit margin by trade
What separates a thin net margin from a healthy one is different in each trade. These are the overhead lines and pricing habits that most often eat net profit.
| Trade | Overhead that grows fastest | Pricing leak that hits net | Lever that helps most |
|---|---|---|---|
| HVAC | Fleet, CSR and dispatch staff, peak-season marketing | Replacements discounted to win against price shoppers | Maintenance agreements that keep techs billable in shoulder seasons |
| Plumbing | After-hours on-call pay, vehicles, stocked trucks | Unbilled second trips and callbacks | Flat-rate pricing on common tasks so speed earns profit |
| Electrical | Estimating time on bids you don't win, licensing and continuing education | Long bids with no material escalation clause | Tracking close rate by job type and bidding fewer losers |
| Roofing | Sales commissions, canvassing and lead costs, office production staff | Storm work priced fast and job-costed never | Job costing every roof against its estimate |
| Landscaping | Equipment and trailers, yard rent, winter payroll | Maintenance routes underbid by drive time | Pricing per visit from real crew hours, plus enhancement upsells |
| Cleaning | Hiring and training, supervision, insurance and bonding | Recurring prices never raised as wages rise | Annual price reviews tied to labor cost |
How do you improve net profit margin?
You improve net profit margin by raising gross margin on each job, getting more billable work through the same overhead, or cutting overhead that doesn't bring in revenue. Volume helps only if each extra job carries a positive contribution margin; busy at a loss is still a loss.
- Raise prices where you're underpriced. Use job costing to find the job types that lose money.
- Spread overhead over more billable hours. Better technician utilization lowers overhead per job without cutting anything.
- Stop leaking leads. Every missed call or unanswered estimate is overhead you paid for (phones, ads, CSR time) with no job to show for it.
- Review overhead line by line once a year. Software, insurance and vehicle costs creep up quietly.
- Collect faster. Profit on paper isn't cash. See cash flow for contractors.
Common net profit margin mistakes
- Counting owner draws as profit. If your pay isn't on the books as a salary, net margin includes your wages and looks better than the business really is.
- Judging jobs by gross margin only. A job has to carry its share of overhead before it makes anything.
- Comparing pre-tax and after-tax numbers. Say which one you mean, and compare like with like.
- Confusing profit with cash. Unpaid invoices, equipment loan principal and owner distributions all affect cash but not net profit the same way.
- Looking once a year. A monthly profit and loss statement shows a slide while there's still time to fix it.
Frequently asked questions
How do you calculate net profit margin?
Subtract cost of goods sold, overhead, interest and (for an after-tax figure) taxes from revenue, then divide what's left by revenue. A company with $1,800,000 of revenue and $162,000 of pre-tax net profit has a 9% net profit margin before taxes.
What is a good net profit margin for a small trades business?
There's no reliable public average for small trades shops, so set your own target. Pay yourself a market salary on the books, decide the profit dollars the business needs for reserves, equipment and a return on your investment, and divide by revenue. Then price so gross margin covers overhead plus that target.
What's the difference between net profit and net profit margin?
Net profit is a dollar amount: what's left after every cost. Net profit margin is that amount divided by revenue, shown as a percentage. $162,000 of net profit on $1,800,000 of revenue is a 9% net profit margin.
Is net profit margin before or after taxes?
It can be either, so always say which. Many small business owners track pre-tax net margin because income taxes depend on entity type and the owner's personal return. Lenders and buyers may ask for both.
Why is my gross margin good but my net margin bad?
Because overhead is taking most of the gross profit. Compare overhead as a percentage of revenue with your gross margin; net margin is roughly the difference. Fix it by raising prices, getting more billable hours through the same overhead, or trimming overhead that doesn't help you win or do jobs.
Does owner's pay count against net profit?
It should. Record a market salary for the work you do in the business as an expense, in the field or the office, and treat profit as what's left. Otherwise net margin includes your wages and overstates how profitable the business is.
Related
- What Is Gross Margin?Gross margin is the share of revenue left after direct job costs. The formula, what counts as COGS for trades, and why service and install margins differ.
- What Is Overhead, and How Do Contractors Calculate It?What counts as overhead in a trades business and how to calculate your overhead rate per revenue dollar, billable hour, job and day, with a worked example.
- Markup vs. Margin: What's the Difference?Markup divides profit by cost; margin divides it by price. Conversion formulas, a markup-to-margin table and the pricing mistake that costs contractors.
- What Is Contribution Margin?Contribution margin is price minus every variable cost of a job. See the formula, how it differs from gross margin, and how to use it before you discount.
- What Is a Break-Even Point?Break-even point is where revenue covers every cost. See how many jobs and how much revenue your trades business needs each month to stop losing money.
- What Is Job Costing?Job costing tracks what each job really cost vs. the estimate. What to track, a sample job cost report with variances, and a simple system for small crews.
- How to Read a Profit and Loss Statement (Contractor's Guide)How to read a profit and loss statement as a contractor: each line explained, a worked P&L for a plumbing shop, ratios to check monthly, and red flags.
- Job Pricing Calculator for ContractorsPrice any job for profit: enter labor hours, burdened rate, materials, overhead and target profit to get the price to quote, your margin and markup.
- How to Price Contracting Jobs for Profit: The Complete GuideHow to price trades jobs: true labor cost, overhead per billable hour, profit margin, materials markup and flat rates, with worked numbers.
- Bookkeeping for contractors that keeps your books tax-ready all yearContractor bookkeeping that stays current: categorized expenses, 1099 subcontractor tracking, sales tax and quarterly tax reminders, synced to QuickBooks.