Profit margin is one of the most-used financial metrics for measuring how efficiently a business converts its revenue into profit. But it is also one of the most frequently misunderstood.
Here is what it actually tells you.
Your profit margin shows what percentage of your revenue you keep as profit after costs are deducted. A higher margin means a healthier, more efficient business — more of every pound you bring in is staying in the business rather than being absorbed by costs.
Investors and lenders use profit margins to assess the financial health of a business, compare it with competitors, and evaluate its sustainability.
One important point: margins vary significantly by industry. A 10% margin might be excellent in one sector and concerning in another. When you benchmark your margin, compare it within your own industry — not against businesses in completely different fields.
Need help understanding your numbers and what they mean for your business? I work with sole traders and small businesses to make sense of their financial position and put the right reporting in place.