Vectix Logic guide
How to Calculate Small-Business Profit Margin
Separate gross and net profit so you can see what products and the whole business are contributing.
Separate direct costs from operating expenses
Direct costs are tied to delivering a product or service: materials, fulfillment or directly attributable labour. Operating expenses support the wider business, such as rent, subscriptions and administration.
Consistent classification matters more than forcing every edge case into a universal category. Document your approach and ask an accountant when reporting rules affect the answer.
Calculate gross profit and gross margin
Gross profit equals revenue minus direct costs. Gross margin divides gross profit by revenue and multiplies by 100. It shows how much revenue remains after delivery costs but before overhead.
If revenue is $100,000 and direct costs are $35,000, gross profit is $65,000 and gross margin is 65%. This helps compare delivery economics over time.
Calculate net profit and investigate changes
Net profit subtracts operating, tax and other expenses from gross profit. Dividing by revenue gives net margin. A negative result is a loss, not a calculation failure.
Use changes as prompts for investigation. A falling margin may reflect pricing, sales mix, cost increases or investment. The number tells you where to ask questions; it does not prescribe one response.
This guide is educational and does not replace accounting, tax or financial advice.