A profit margin is a measure of how much profit your business keeps from every pound of revenue it earns. It’s expressed as a percentage, and it tells you how efficiently your business converts sales into profit.
There are several types of profit margin, each calculated at a different point in the profit and loss account. The two most commonly used are gross profit margin and net profit margin.
Gross Profit Margin
| Formula: (Gross Profit ÷ Revenue) × 100 Gross profit = Revenue minus the direct cost of producing your goods or services (cost of sales). |
| 📊 Example A UK bakery generates £80,000 in annual revenue. Ingredients and direct production costs: £28,000 Gross Profit: £52,000 Gross Profit Margin: (£52,000 ÷ £80,000) × 100 = 65% |
The gross profit margin tells you how much profit remains after covering the direct costs of production, before your overheads (rent, wages, marketing etc.) are accounted for.
Net Profit Margin
| Formula: (Net Profit ÷ Revenue) × 100 Net profit = Gross profit minus all operating expenses, interest, and tax. |
| 📊 Example Continuing the bakery example: Gross Profit: £52,000 Less: Staff wages, rent, utilities, marketing: £38,000 Less: Corporation tax: £3,500 Net Profit: £10,500 Net Profit Margin: (£10,500 ÷ £80,000) × 100 = 13.1% |
The net profit margin is the ‘bottom line’ margin, it shows the percentage of revenue that translates into actual profit after every cost has been accounted for.
What is a Good Profit Margin for a UK Small Business?
Profit margins vary significantly by sector. Here are typical ranges for UK small businesses:
| Sector | Gross Margin | Net Margin |
| Professional Services | 60–80% | 20–35% |
| Retail | 30–50% | 3–8% |
| Restaurants / Hospitality | 60–70% (food cost) | 5–10% |
| Construction / Trades | 25–40% | 5–15% |
| Software / SaaS | 70–85% | 20–40% |
| Manufacturing | 30–50% | 8–15% |
These are approximate ranges. What matters most is whether your margins are improving over time, and whether they’re sufficient to sustain the business after accounting for all costs.
How to Improve Your Profit Margins
- Increase prices, even a small price increase has a disproportionate impact on profit
- Reduce cost of sales, negotiate better supplier terms, reduce waste, improve production efficiency
- Cut overheads, review every regular expense; cancel unused subscriptions and services
- Improve your product or service mix, focus on higher-margin products or clients
- Use accounting software to monitor margins in real time rather than waiting for annual accounts
Frequently Asked Questions
Not necessarily. Some very successful businesses operate on thin margins but at enormous volume (supermarkets, for example). What matters is that your margin is sufficient to cover all your costs, reinvest in the business, and provide a fair return for the risk you take as an owner.
Margin is profit expressed as a percentage of selling price. Markup is profit expressed as a percentage of cost. They measure the same thing from different directions. A 50% markup on a product that costs £10 gives a selling price of £15, a gross margin of 33%.
