The profit ladder
Each margin is that profit divided by revenue.
Example
$100,000 of revenue, $40,000 of COGS and $30,000 of operating expenses gives $60,000 gross profit (60% margin) and $30,000 operating profit. After 21% corporate tax, net profit is $23,700 — a 23.7% net margin.
What is a good profit margin?
It varies enormously by industry. Grocery stores often run net margins of 1–3%, restaurants 3–6%, while software companies can exceed 20%. Compare your margins with businesses in the same industry and track the trend over time.
Ways to improve profit
- Raise prices or shift the mix toward higher-margin products.
- Cut COGS through supplier negotiation, less waste or better processes.
- Keep operating expenses growing slower than revenue.
Related Business Accounting & Tax Tools
Analyzing gross, operating, and net profit margins ensures commercial solvency. Determine minimum sales volumes needed with our Break Even Calculator, measure marketing and capital returns using the ROI Calculator, estimate quarterly self-employment taxes via the Freelancer Tax Calculator, and account for merchant transaction fees with our PayPal Fee Calculator.
Frequently asked questions
What's the difference between gross and net profit?
Gross profit only subtracts the direct cost of what you sold. Net profit subtracts everything — overheads, interest and taxes — so it's what's actually left for the owners.
What tax rate should I use?
US C-corporations pay a flat 21% federal rate plus any state tax. Pass-through businesses (sole proprietors, LLCs, S-corps) are taxed on the owners' personal returns, so use your personal marginal rate.
Why is EBITDA useful?
It strips out financing and accounting choices, making it easier to compare the operating performance of different companies.