What this tool measures
The question this page answers
How much of your revenue survives the cost of delivering the work, and then how much survives running the business.
Revenue does not tell you how healthy a business is. Profit margin shows how much money remains after direct costs and operating expenses.
Use this calculator to compare products, services, months, locations, or offers. A small change in margin can have a major effect on cash flow and growth.
Formula
Exactly how the result is calculated
- Gross profit
- revenue − direct costs
- Gross margin
- gross profit ÷ revenue × 100
- Operating profit
- gross profit − operating expenses
- Net margin before taxes
- operating profit ÷ revenue × 100
All outputs are direct arithmetic on the three numbers you enter. Margins return 'Not available' when revenue is zero.
Scope
What is counted, and what is not
Included
- Direct costs: materials, direct labour, subcontractors, shipping, and merchant fees.
- Operating expenses: rent, admin payroll, software, insurance, marketing, and utilities.
Excluded
- Taxes — this is a pre-tax figure.
- Interest, loan principal, and depreciation, unless you include them in operating expenses.
- Owner distributions taken as profit rather than salary.
- Anything about cash timing. A profitable month can still be a month you cannot make payroll.
Assumptions built into the model
- Direct costs and operating expenses are cleanly separated — the assumption that does most of the work here.
- The period is internally consistent: revenue, costs, and expenses all belong to the same span.
- Revenue is recognised when earned rather than when paid.
Worked scenario
Worked scenario: a custom cabinetry shop with a revenue problem that is not a revenue problem
Three staff, a workshop, and a good order book. Revenue last month was $145,000 — the best in the shop's history. Materials, workshop wages, and installation subcontractors came to $92,000. Rent, the office manager, insurance, software, vehicles, and marketing came to $41,000. The owner is confused about why the bank balance is not growing.
Inputs used
- Revenue
- $145,000
- Direct costs
- $92,000
- Operating expenses
- $41,000
What the calculator returns
- Gross profit
- $53,000
- Gross margin
- 36.6%
- Operating profit
- $12,000
- Net margin before taxes
- 8.3%
Record revenue produced an 8.3% net margin. The shop keeps about eight cents of every dollar it invoices, before tax.
The gross margin is where the answer is. At 36.6%, every dollar of new work brings only 37 cents toward the $41,000 of overhead. Growing revenue at this margin adds pressure — more materials to buy, more wages to fund, more cash tied up — for a thin slice of contribution.
The useful next question is which jobs are dragging the average down. A single underquoted install or one subcontractor rate that crept up can move a whole month. Run this calculator per job type rather than for the shop as a whole, and the average stops hiding the problem.
Illustrative arithmetic only. These figures are chosen to show how the calculation behaves; they are not a case study, a client result, or a claim about typical performance.
Reading the result
How to interpret your primary result
- Read gross margin before net margin. Gross margin tells you whether the work itself is priced correctly; net margin tells you whether the business around it is the right size.
- A healthy gross margin with a poor net margin is an overhead problem. A poor gross margin makes everything downstream harder regardless of overhead.
- Compare the same measure across months and job types. A single month's margin in isolation says very little.
Accuracy
What can make this result misleading
- Putting direct costs into operating expenses. This inflates gross margin and hides underpricing — the most common error with this calculator.
- Leaving out unpaid owner labour. If you work in the business without being paid, your margin is subsidised by you.
- Mixing periods — this month's revenue against last month's supplier invoices.
- Averaging across very different job types, so profitable work masks unprofitable work.
When the answer is bad
What to do if the result is unfavourable
- 1 Break the period down before you act. Company-wide margin rarely tells you what to change; job-level or product-level margin usually does.
- 2 Check pricing against actual delivered cost on your three most recent jobs. Quoted margin and delivered margin diverge quietly.
- 3 Look for scope creep and rework. Both show up as direct cost and neither appears on the invoice.
- 4 Do not reflexively cut marketing to protect net margin. If gross margin is the problem, cutting demand generation makes the overhead harder to cover, not easier.
- 5 If net margin is negative, work out how many months of cash you have before deciding anything. That deadline determines which levers are actually available to you.
Pitfalls
Common mistakes with this calculation
- Chasing revenue growth to fix a margin problem.
- Using markup and margin interchangeably — a 50% markup is a 33% margin, and confusing them systematically underprices work.
- Reviewing margin annually, by which point a bad quarter is already spent.
- Discounting to win work without checking what it does to contribution.
What to do next
Turn the estimate into a practical next step
- 1 Review margins by product, service, customer type, or channel instead of only company-wide.
- 2 Separate direct costs from overhead so gross margin stays clear.
- 3 Look for low-margin offers that consume staff time or cash.
- 4 Test price, packaging, vendor cost, and fulfillment changes before cutting growth spend.
- 5 Track margin monthly so problems appear before cash gets tight.
FAQ
Common questions
What is the difference between gross margin and net margin?
Gross margin looks at revenue after direct costs. Net margin looks at what remains after operating expenses as well. Both are useful, but they answer different questions.
Should owner pay be included?
For management reporting, include normal owner compensation if it is part of operating expenses. This makes the business model clearer and avoids overstating profit.
Can revenue grow while profit margin falls?
Yes. More sales can reduce margin if discounts, labor, returns, ad costs, or fulfillment problems grow faster than revenue.
Is this a tax calculation?
No. This is an educational business planning calculator and does not replace tax or accounting advice.
Before you rely on this estimate
This tool is for general educational planning only. It is not tax, legal, accounting, investment, or financial advice. Review important business decisions with qualified professionals who understand your company and location.
This tool's limitations, the situations where professional advice is the right call, and every formula and planning assumption behind it are documented on the methodology page.
If something here looks wrong — including a planning assumption you disagree with — please tell us. Corrections are made on the page and logged with a date on the updates page.