Guide · Profitability

What's a good profit margin for a small business?

There's no single good number. A healthy margin for a grocery store would be a crisis for a software company. The useful questions are how your margin compares with businesses like yours, and which customers and products are pulling it down.

Two margins to know

Gross margin

What's left from each sales dollar after the direct cost of delivering what you sell (materials, freight, direct labor), before overhead.

Net margin

What's left after everything: rent, salaries, software, interest and taxes. This is what the business actually earns.

Buyers and lenders often look at a third figure, EBITDA margin: earnings before interest, taxes, depreciation and amortization, divided by revenue. It shows how profitable the operations are regardless of how the business is financed.

Why "good" depends on your industry

Businesses that resell physical goods (distribution, retail, construction) tend to run thinner margins and make money on volume. Service and software businesses tend to run higher gross margins because the cost of delivering one more sale is small. Comparing your margin to a generic "average" across all businesses tells you very little.

Where to find real benchmarks

• Your trade association. Many publish annual cost and margin surveys for members.
• RMA Annual Statement Studies. Financial ratios by industry and company size, compiled from bank lending data. Your banker or a library may have access.
• NYU Stern margin data. Professor Aswath Damodaran publishes free margin tables by industry each year. They're based on public companies, so treat them as a rough guide for small firms.
• IRS Statistics of Income. Free aggregate tax data by industry, useful for broad comparisons.

The margin that matters most: by customer and product

Your overall margin is an average, and averages hide problems. It's common for a business's biggest customer by revenue to be one of its least profitable once discounts, rush orders, freight and returns are counted. Run your gross margin by customer and by product line, and you'll usually find a few that earn far less than the rest.

How to raise it

1. Re-price the outliers. Customers below your target margin either get a new price or a different service level.
2. Renegotiate your biggest costs. Supplier prices drift up when nobody checks. See our guide on finding wasted spending in QuickBooks.
3. Charge for the extras. Rush fees, small-order fees and freight are often absorbed by habit rather than by decision.
4. Cut overhead that doesn't earn its keep. Idle software, unused space and uncoded spending all come straight out of net margin.