Net profit margin is the bottom line as a percentage. If your business generates $500,000 in revenue and $35,000 in net income, your net profit margin is 7%.
What's a healthy net profit margin?
Greg Crabtree's Simple Numbers framework sets 10% pre-tax profit as the target floor for small businesses — the minimum that indicates a financially healthy, self-sustaining operation. Below 10%, you're typically not generating enough to properly fund taxes, eliminate debt, build reserves, and pay the owner fairly. Above 15%, you have real flexibility.
Why margins vary by industry
A 5% net margin at a restaurant is normal. A 5% net margin at a software company is a problem. What matters for your specific business is whether your margin is high enough to fund the Four Forces in the right priority order.
Margin vs. dollars
A 15% margin on $200,000 in revenue generates $30,000. A 10% margin on $600,000 generates $60,000. Watch both the percentage and the absolute number.
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