Dictionary

Net profit margin

“The percentage of revenue left as profit after all costs, including interest and tax: net profit divided by revenue. It differs from gross margin, which only deducts the direct cost of what you sell.”

Why net profit margin matters to a first-time founder

Net profit margin shows how much of each pound of revenue remains after operating costs, interest, tax and other recognised expenses. It helps founders track overall profitability and compare periods. A weak margin can expose pricing or cost problems, but industry, growth stage and accounting choices affect useful benchmarks.

Examples of net profit margin

A company earns £500,000 in revenue and reports £40,000 of net profit. Dividing £40,000 by £500,000 and multiplying by 100 gives an 8% net profit margin. In simple terms, 8 pence of each revenue pound remains as accounting profit after all recognised expenses.

Common misunderstanding

Net profit margin is not gross margin. Gross margin subtracts the direct cost of goods or services, while net profit margin includes all recognised expenses. It is also not a cash margin: non-cash charges and payment timing mean profit can differ materially from cash generated.

When to use it

Use it in monthly or quarterly reporting once accounts are reasonably complete. Compare like periods, explain unusual items and review gross margin, operating margin and cash flow alongside it. For a very early startup with little revenue, unit economics and runway may guide decisions better than this percentage.