Your business’ net profit margin might be good, but is it good enough?
Learn what a good net profit margin looks like in business and discover ways to improve yours with this article. We’ll cover everything you need to know about why your margins might be lacking and how you can use your net profit margins across time to expand your business.
- What is a ‘good’ net profit margin?
- How to decide whether your net profit margin is ‘good’
- How to use your business’ net profit margins
- How to improve your net profit margin with Countingup
Whether you’re launching a new business as a sole trader or limited company director, it’s important to understand your net profit margin and how to use it. If you’re at an earlier stage in your business and need to be able to calculate your net profit margin first (before judging it), read our article How to calculate net profit margin.
What is a ‘good’ net profit margin?
In the broadest sense, a good net profit margin is anything above 0%. This means your business is making a profit even if your figures are single-digits and you’re not making very much money. Critically, if your net profit margin is 0% or below, you should begin planning growth strategies and cost-cutting exercises as fast as possible. Otherwise, your business may continue losing money.
It’s normal for many businesses to make losses (and therefore have negative net profit margins) while they set up. Therefore, low or negative net profit margins aren’t necessarily a bad thing, especially as you’re starting out. However, the longer your business is trading, the more expectation there is that your net profits will be at least above 0%. Therefore, a good net profit margin is anything above 0% and ideally as high as possible.
Unfortunately, net profit margins vary wildly between industries and what is a ‘good’ margin in one business might be terrible in another. Therefore, we’ve included industry examples that have higher and lower net profit margins below to give you some more context.
Industries with low margins
While exact figures change each year, industries with low net profit margins can include grocery shops, clothing and care businesses for young children and the elderly. These examples can have margins as low as 2-3% and may only reach around 10% on average during good years.
This does not mean that these businesses can’t function or aren’t profitable, of course. Each example occupies essential niches within the UK market and can therefore rely on customer interest to make a profit from. Put another way, these businesses are still profitable because we’ll always need food, clothes and people to take care of our family. Therefore, don’t be scared your business will fail if your margins are in single digits, as long as there is sufficient demand for your products or services.
Industries with high margins
By contrast, some of the highest net profit margin industries include luxury retail, jewellery, software and consultancy. Each can have net profit margins upwards of 50%.
It’s worth noting that each industry has high margins in different ways. Some offer high-value items with low raw material costs (jewellery), some have minimal operating costs to compensate for (consultancy), while others sell to customers directly and offer instant product functionality (software). However, just because your business has high margins, it doesn’t necessarily mean you’ll be profitable as there are other factors at play like successful marketing and sound financial management. Therefore, you should take into account as many factors as possible before making strategic changes to your business.
How to decide whether your net profit margin is ‘good’
It’s important not to take the above figures as gospel as they’re merely industry averages. Some businesses within the same industry will have higher margins, while others will have lower ones.
Exactly how much these net figures vary depends on the context. For example, ‘clothes retailers’ is a broad category that includes everything from high-fashion branded labels to cheaper high street options. In this example, margin figures might be around 5% for the latter versus 35% for the former.
Therefore, each pulls the industry average net profit figure in opposing directions. When deciding whether your business’ net profit margin figure is good or not, we recommend:
- Using fair comparisons when appraising your business: compare within the same industry and size to your business where possible. Do lots of research to have a good understanding of how you really compare.
- Not mistaking consistently low profit margins as necessarily bad: any profit is still good and some industries have a lower ceiling figure than others. Therefore, if you’re in an industry with low margins, your strategy should be to maintain this figure rather than grow it against the economic factors that are keeping it low.
How to use your business’ net profit margins
You can use your financial records and better understand your business’ performance by using net profit margins as a key performance indicator (or KPI) for your business.
KPIs like net profit margins are used by businesses to measure how small changes to their operations can impact performance across time. This can then allow you to begin optimising your business strategy to be more profitable as you have a better idea of what works. You can begin doing this by recording your business strategy each week or month and calculating its associated net profit margin. From here, you can then make small tweaks and see what improves this KPI measurement versus what doesn’t.
Find more advice on improving your net profit margins and begin using it as a KPI for your business with our dedicated article What is net profit.
How to save time on your financial admin
Expanding your business and growing your net profit margins are essential elements of any new business. You can save time on your bookkeeping with Countingup and spend more time growing your business instead.
Countingup is the business current account and accounting software in one app. With all your financial information in one place, you can automate your bookkeeping admin to save time and stress on running your business.
The Countingup app offers real-time profit and loss insights, so you can see how strategy changes to your business affect your net profit margin as they happen.
Countingup also has key innovative features for new business owners, like expense capture reminders, tax estimations and automated invoicing. These can help you make sure your accounts are always up to date, accurate, and completely tax compliant.
Gain complete confidence in your finances. Find out more here and sign up today for free.