Profit margin is the percentage of revenue a business keeps after expenses. Ten to twenty percent net is typical for a service business.
Margin is always a percentage, never an amount. A business making $40,000 of profit on $200,000 of revenue and one making $40,000 on $800,000 have the same profit and are not the same business.
Moving it is improving your profit margin.
Gross margin
Gross margin is what is left after the direct cost of doing the work — the materials on the job and the labor that performed it — and before any overhead.
Ten thousand dollars of work costing six thousand in materials and job labor is a 40% gross margin.
It answers one question: is the work priced correctly? It says nothing about whether the business is viable, because it has not paid the rent yet.
Net margin
Net margin is what is left after everything — direct costs and overhead both. Rent, insurance, admin, software, vehicles, the office, and every other cost that continues whether or not you sell anything.
The same ten thousand dollars of work, at 40% gross, leaves four thousand. If the overhead carried by that period is two thousand five hundred, net margin is 15%.
Net margin answers the question the business actually turns on: does this work at all? It is the last number in the chain, and everything else exists to protect it.
Net margin is also called net profit margin. On a profit and loss it is the bottom line expressed as a percentage of revenue.
Reading the two together
This pairing is the fastest diagnosis available in a small business, and each combination has a different fix.
Gross healthy, net thin — the work is priced right and the business carries too much cost. Look at overhead. Cutting costs reaches this one.
Gross thin — the work is underpriced or mis-costed. No amount of overhead cutting reaches it, because the problem sits upstream of overhead. Look at pricing, and at job costs.
Both thin — start with gross. Pricing is the shorter path and it lifts both at once.
Both healthy and cash still short — margin is not cash. See cash and accrual.
Percentage versus amount
Because it tells you what growth will do to you.
At a 4% net margin, doubling revenue doubles a small number — and doubles the work, the risk, the payroll and the strain that produced it. At 15%, growth is worth having.
Businesses that grow hard on a thin margin usually find this out after committing to the growth: more revenue, more staff, more vans, and no more money.
Owner's pay is the trap
In a small business the owner's own pay is frequently not in the overhead, which makes net margin look better than it is by exactly the amount the owner is underpaying themselves.
The honest version includes a market wage for the work you personally do. If the margin goes negative once it is in, that is worth knowing rather than avoiding: it means the business is currently funded by your labor rather than by its own economics, and growth does not fix that on its own.
Markup and margin are not the same
A margin target applied as a markup does not produce that margin. A 40% markup yields roughly a 29% margin, consistently, on every job.
See markup and margin — the most expensive arithmetic mistake in the trades, and invisible from the inside because every job is priced consistently wrong.
An average hides its spread
A healthy overall margin routinely contains work sold at a loss, carried by work sold well.
The average tells you the business is viable. It does not tell you which work is carrying it, which is the more actionable question — see job margin.