Why use this calculator
Margin is the number that decides whether a business survives a slow quarter, and it is also the number owners most often get wrong. Margin and markup describe the same dollar of profit measured against two different bases: margin divides profit by the selling price, markup divides it by the cost.
A 50% markup is only a 33.33% margin, so anyone who prices at a 50% markup while budgeting on a 50% margin is short by a third of the expected gross profit on every single sale, and will not see it until the year-end accounts arrive.
This calculator shows both figures side by side from one set of inputs, adds operating expenses so the net margin that actually reaches the bank is visible, and reports cost of goods sold as a share of revenue, which is the fastest way to spot supplier price creep before it eats a whole year of profit.
How to use it
- Enter revenue as the selling price of one unit if you are pricing a product, or as the total sales line from the top of your profit and loss statement if you are reviewing a trading period.
- Enter cost as the direct cost of producing or buying what you sold, which sits as cost of goods sold or cost of sales immediately under revenue in the profit and loss, and remember to include inbound freight, packaging and card or marketplace fees charged on the sale.
- Enter operating expenses as everything below the gross profit line for the same period: rent, wages that are not part of production, software subscriptions, insurance, marketing and accounting fees.
- Keep every figure on the same basis, either all excluding GST or all including it, or the percentages will not reconcile to your accounts.
What each result means
- Gross profit
- Revenue left after the direct cost of what you sold. It is the pool every overhead, wage and loan repayment has to come out of.
- Gross profit margin
- Gross profit as a percentage of revenue. This is the figure lenders, buyers and accountants mean when they say margin without qualifying it.
- Markup on cost
- The same gross profit expressed as a percentage of cost. Always larger than the margin, and the number most suppliers and retail systems use for pricing.
- Net profit
- What is left after operating expenses as well as direct costs. This is the number that funds tax, owner drawings and reinvestment.
- Net profit margin
- Net profit as a percentage of revenue. Comparing it against your sector average shows whether the problem is pricing or overhead.
- Cost of goods sold as a share of revenue
- The mirror of gross margin. Watching it creep upward month to month is the earliest warning of supplier price rises or stock shrinkage.
The formula
Gross profit = Revenue − Cost of goods sold
Gross profit margin
% = (Gross profit ÷ Revenue) × 100
Markup % = (Gross profit ÷ Cost) × 100
Net profit = Gross profit − Operating expenses
Net profit margin
% = (Net profit ÷ Revenue) × 100
Revenue is the sale price or total sales, Cost is the direct cost of the goods actually sold, and Operating expenses are the period costs that do not vary with each unit.
The base is the whole difference between the two headline percentages: margin is measured against revenue, markup against cost, and they convert as
Margin = Markup ÷ (1 + Markup)
How this number is used in practice
Gross margin varies enormously by sector, so the useful comparison is always against businesses like yours rather than against a general number. Grocery and fuel retail run on roughly 5% to 25% gross margin and survive on volume. General wholesale and distribution typically sit around 15% to 25%.
Building and construction contracting commonly lands at 15% to 30% on jobs. Hospitality food cost is usually managed to a 60% to 70% gross margin, with beverages higher again. Fashion and homewares retail generally target 50% to 60%. Professional services and software sit at 70% to 90% because the direct cost of delivering one more unit is small.
Net margin is a much narrower band: many healthy small businesses land between 5% and 15%, and a sustained net margin under 5% leaves no buffer for a rate rise, a bad debt or a quiet month.
Accountants act on these numbers in a fixed order. If gross margin has fallen, the cause is in pricing, purchasing, discounting or stock loss, and no amount of overhead cutting will fix it. If gross margin is steady but net margin has fallen, the cause is overhead growth, and the fix is a line-by-line review of the expenses below the gross profit line.
Because a one point movement in gross margin on a business turning over $2 million is $20,000 of profit, margin is normally reviewed monthly rather than annually. Owners preparing a business for sale watch it even more closely, since valuations are usually struck as a multiple of normalised earnings, and a single point of durable margin improvement can lift a sale price by several times its annual value.
Worked examples
Retail product: $100 sale, $60 of stock, $25 of overhead
Gross profit $40.00 at a 40.00% gross margin, which is a 66.67% markup on cost, leaving 15.00% net margin.
Cafe month: $18,000 revenue, $6,300 food and beverage cost, $9,900 of wages, rent and utilities
Gross margin 65.00% and net margin 10.00%, with cost of goods sold running at 35.00% of revenue.
Wholesaler on thin margins: $250,000 revenue, $212,500 cost of goods, $30,000 of overhead
Gross margin only 15.00% and net margin 3.00%, so a 1% supplier price rise removes a fifth of the profit.
When people use it
- Setting a selling price that still leaves a target gross margin after supplier costs
- Reviewing a monthly profit and loss to see whether a profit fall came from pricing or overhead
- Converting a supplier's quoted markup into the margin your accounting system reports
- Comparing your profitability against published benchmarks for your industry
- Testing whether a discount or promotion still leaves a positive contribution
- Preparing figures for a lender, an investor or a business sale
Tips
- Margin and markup are not the same number. Convert with Margin = Markup ÷ (1 + Markup): a 50% markup is a 33.33% margin.
- Put merchant, marketplace and payment fees into cost of goods sold. They scale with every sale, so leaving them in overhead flatters gross margin.
- Compare like with like on GST. Mixing a GST-inclusive sale price with a GST-exclusive cost overstates margin by roughly the tax rate.
- Track gross margin monthly, not yearly. A one point slide on $2 million of revenue is $20,000, and it is invisible in a single invoice.
- A discount costs far more margin than it costs price. On a 40% margin, a 10% discount removes a quarter of the gross profit on that sale.
- Rising cost of goods sold as a share of revenue usually means supplier increases, stock shrinkage or unrecorded discounting, in that order of likelihood.
What it assumes, and where it stops being accurate
- Revenue, cost and operating expenses are all entered on the same basis and for the same period. Mixing a monthly cost with an annual revenue makes every percentage meaningless.
- Cost of goods sold is treated as fully variable and operating expenses as fully fixed, which is a simplification. Part-variable costs such as delivery wages sit in between.
- GST, VAT and sales tax are excluded. The calculator works on tax-exclusive figures, and mixing bases distorts the result by the tax rate.
- It is not an income tax calculation. Net profit here is accounting profit before company or personal income tax, and before owner drawings.
- It does not handle inventory timing. If stock was bought in one period and sold in another, only the cost of goods actually sold belongs in the cost field.
- Depreciation, interest and one-off items are only included if you put them in operating expenses, so the net margin is not necessarily EBITDA or statutory net profit.
Terms used on this page
- Gross profit
- Revenue less the direct cost of the goods or services sold, before any overhead.
- Cost of goods sold
- The direct cost of producing or buying what was actually sold in the period.
- Markup
- Profit expressed as a percentage of cost, used to build a selling price up from cost.
- Net profit margin
- Net profit as a percentage of revenue, after both direct costs and operating expenses.
- Contribution
- Revenue less variable costs, being the amount each sale contributes towards fixed costs.
Questions people ask
- What is the difference between margin and markup?
- They measure the same profit against different bases. Margin divides profit by the selling price, markup divides it by the cost. A $40 profit on a $100 sale with $60 of cost is a 40% margin and a 66.67% markup. Markup is always the larger figure, and confusing the two is the most common costing error in small business.
- What is the difference between gross and net profit margin?
- Gross margin counts only the direct cost of what you sold, so it measures pricing and purchasing. Net margin also subtracts operating expenses such as rent, wages and insurance, so it measures the whole business. Gross margin can look healthy while net margin is negative, which simply means overheads are too large for the current sales volume.
- What is a good profit margin?
- It depends entirely on the sector. Grocery and fuel run at 5% to 25% gross margin, wholesale near 15% to 25%, hospitality around 60% to 70%, and software 70% to 90%. Net margin is far more uniform: most healthy small businesses land between 5% and 15%, and below 5% leaves little buffer for a bad month.
- Should cost of goods sold include labour?
- Include labour that varies directly with output, such as production staff paid per unit or contractors billed to a job. Keep salaried administration, management and permanent overhead staff in operating expenses. The test is whether the cost would disappear if you sold nothing that period; if it would, it belongs in cost of goods sold.
- How do I convert a margin into the price I should charge?
- Divide the cost by one minus the margin expressed as a decimal. For a 40% margin on a $60 cost, that is $60 ÷ 0.60, which is $100. Never multiply the cost by the margin, because that produces a markup instead and leaves you short of the target on every sale.
- Why does my accounting software show a different margin?
- Usually because of what sits in cost of goods sold. Software often puts freight, merchant fees or subcontractor costs in overhead rather than direct cost, which raises reported gross margin. It may also be reporting GST-inclusive sales against GST-exclusive costs. Check the mapping of each expense account before treating the two figures as comparable.
Use this with
Profit Margin Calculator answers one part of the question. These pick up where it stops: Markup Calculator, Break-Even Calculator, Pricing Strategy Calculator and SaaS Gross Margin Calculator.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- business.gov.au: Australian Government business portal. Official guidance on pricing, cash flow and financial management for small business
- U.S. Small Business Administration. Pricing, break-even and financial planning guidance for US businesses
- Australian Bureau of Statistics. Industry-level business performance and profitability statistics
Profit Margin Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.