Net Profit Margin Formula, With a Free Calculator

Net profit margin = net profit ÷ sales. Net profit is what's left of sales after everything: the cost of goods sold, then rent, fees, marketing, insurance, the owner's salary if there is one, and interest. A granola maker with $191,100 of sales and a 47.9% gross margin ends the year with $13,800 of net profit before income tax, a net profit margin of 7.2%. Take the owner's $36,000 salary out of the expenses and the same year shows 26.1%, which is why two small businesses' "profit margins" are rarely the same thing. Below is the formula, the year from top to bottom, the owner's salary, what a price change does, and a free calculator.

The short version

• Net profit = sales − cost of goods sold − operating expenses − interest (and income tax, for after-tax profit).
• Net profit margin = net profit ÷ sales.
• Gross margin counts only the cost of goods sold; net margin counts everything.
• Decide whether the owner's pay is an expense, and say so, or the margin means nothing.
• A small change in price moves net margin a lot, because every cent of it is profit.
• TaroStack costs every batch, so the cost of goods sold at the top of the sum is real. More below.

The formulas

Each step has its own margin: gross 47.9%, operating 7.8%, net 7.2%. Income tax comes off last; for a sole owner or a single-member LLC it's paid on the owner's personal return, so a small business's books often stop at profit before income tax, as here.

An example: a granola maker's year

Cache Valley Granola Co., a made-up granola maker in Logan, Utah, I use in these examples, sells bags at markets, online and to shops, bulk granola to cafés and granola bars:

Of each dollar of sales, 52 cents goes into the granola, 40 cents to running the business and paying the owner, and 7 cents is left. The kitchen rent and the owner's salary are most of the 40 cents.

The owner's salary

Cache Valley pays its owner $36,000 a year as an expense. Plenty of small businesses don't: the owner takes what's left. Then the same year's net profit is $49,800 and the margin 26.1%, though nothing about the business changed. Neither figure is wrong; they answer different questions. 7.2% says what the business earns after paying someone to run it; 26.1% says what it pays its owner, all in. Compare a margin with another business's only when you know which one it is. What's typical for food makers is in good profit margin for a food product.

What a price change does

Shops pay $5.40 for a 12-ounce bag, and buy 14,000 a year. Thirty cents more a bag, $5.70, with nothing else changed, adds $4,200 to sales and the same $4,200 to net profit: $18,000, a 9.2% margin. A price rise goes straight to the bottom line because every cost above it stays the same. The same is true in reverse: a 30-cent rise in the cost of oats and almonds per bag, not passed on, takes $4,200 off. How price and cost compare as a share of the price is in markup vs margin.

What a good net profit margin is

Enough to pay back what the business borrowed, save for the next mixer, and get through a bad year. For a small maker that pays its owner a salary, a net margin in single digits is common; one that doesn't pay the owner shows a much bigger number that isn't really profit. The test is what's left in cash, after the salary and the loan payment, at year end. How many sales it takes to cover the fixed costs is in break-even point for a food business, and how much each sale contributes in contribution margin example.

Get the calculator

Download the net profit margin calculator. One sheet with the year from sales down: cost of goods sold, each operating expense and interest, each as a share of sales, with gross, operating and net margins at the side, the net margin before the owner's salary, and a box to test a price change on any number of units. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.

Where this stops working

The net margin is only as right as the cost of goods sold at the top of it, and that's the line built from the most guesses: what each batch really cost, what was thrown out, what's still on the shelf at year end. A net margin worked out once a year from the tax return arrives too late to change anything.

How TaroStack does it

TaroStack costs every batch, so the cost of goods sold at the top of the sum is real.

Batches at what they cost. Each batch takes its oats, nuts and honey off stock at what was paid, first-in-first-out or moving average, with its labor minutes, so the cost of every bag sold comes from the batch it was made in.

Stock value by month. Stock is valued by site and by month, so the cost of goods sold for a month or a year is opening stock plus what came in minus what's left, from the books, checked by a count.

Margins where they're made. Margins are reported by product and by customer, so the shop bags at $5.40 and the market bags at $9 each show what they leave, before the price change is decided. A report shows which ingredients' prices have crept up.

Recipes, batch costing, stock value and margin reports are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

How do you calculate net profit margin?

Subtract every cost from sales, the cost of goods sold, operating expenses and interest, and divide what's left by sales. In the example, $13,800 ÷ $191,100 = 7.2%.

What is the difference between gross and net profit margin?

Gross margin subtracts only the cost of goods sold: 47.9% in the example. Net margin subtracts everything else too: 7.2%.

What is a good net profit margin for a small business?

One that leaves cash after the owner's pay and the loan payments. A maker that pays its owner a salary often runs a net margin in single digits.

Should the owner's salary be included in net profit?

Say which way you count it. In the example, net margin is 7.2% with the owner's $36,000 salary as an expense, and 26.1% without it.