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Chris has been with Starpeak Insurance Solutions for 5 years. Before starting with the company, Chris was involve...
For many small businesses, sales figures are the headline number. But revenue alone doesn’t determine success. What really matters is how much of that revenue you actually keep. That’s where profit margin comes in.
Profit margin measures how efficiently your business turns income into profit. It helps you understand whether your pricing works, whether your costs are under control, and whether your business is financially resilient enough to cope with unexpected events.
According to data from the Office for National Statistics (ONS), profitability varies significantly across UK industries, with sectors such as retail and hospitality often operating on tighter margins than professional services. In periods of rising costs and economic uncertainty, understanding your own margin is more important than ever.
In this guide, we explain what profit margin is, the different types, what counts as “good”, and how to calculate it properly.
What is profit margin?
Profit margin is a financial ratio that shows what percentage of your revenue remains as profit after costs are deducted.
If your business earns £10,000 and retains £2,000 after expenses, your profit margin is 20%. In other words, for every £1 generated, 20p is profit.
This percentage provides insight that revenue alone cannot. Two businesses may generate identical turnover yet operate with very different levels of financial stability depending on their margins.
For small businesses, profit margin directly affects:
- Cash flow resilience
- Ability to reinvest in growth
- Capacity to absorb rising costs
- Long-term sustainability
Understanding this figure allows you to make informed decisions about pricing, cost control and investment.
What is gross profit margin?
Gross profit margin measures how profitable your core product or service is before wider operating costs are taken into account.
It focuses on revenue minus direct costs — often called cost of goods sold (COGS). These typically include materials, stock purchases or direct labour required to deliver your product or service.
The formula is: (Revenue – Direct Costs) ÷ Revenue × 100
Gross margin is particularly useful when reviewing pricing. If it is too low, it may suggest supplier costs are high, discounting is excessive, or pricing needs adjustment.
For product-based businesses especially, a healthy gross margin creates the financial space needed to cover overheads such as rent, utilities, marketing and insurance.
If you’re reviewing your pricing structure, you may find it helpful to read our guide to pricing your products for profit.
What is net profit margin?
Net profit margin measures what remains after all business expenses have been deducted.
This includes overheads such as rent, utilities, marketing, salaries, loan repayments, insurance and tax.
The formula is: Net Profit ÷ Revenue × 100
Net profit margin provides a more complete picture of financial health. A business may have a strong gross margin but still operate on a tight net margin if overheads are high or rising.
Regularly reviewing this figure helps you identify cost pressures early and maintain control over long-term profitability.
Gross vs net profit margin: what’s the difference?
While both metrics measure profitability, they answer slightly different questions. Gross margin focuses on how profitable your product or service is at its core. Net margin reflects the overall financial performance of the business.
The table below highlights the key differences:
| Factor | Gross Profit Margin | Net Profit Margin |
| What it measures
| Profit after direct production costs
| Profit after all business expenses
|
| Costs included
| Materials, stock, direct labour
| All costs including rent, salaries, insurance and tax
|
| Purpose
| Shows product/service profitability
| Shows overall business profitability
|
| Business insight
| Helps guide pricing decisions
| Indicates financial stability and sustainability
|
| Scope
| Operational performance
| Full financial performance
|
Understanding both figures gives you a clearer, more strategic view of your business performance.
What is a good profit margin?
There is no universal “good” profit margin because it varies significantly by industry.
Retail and hospitality businesses often operate on margins below 10%, while construction businesses may see mid-single digit margins. Professional services and consultancy businesses, with lower material costs, can achieve margins of 15–30% or more.
As a general guide:
- Below 5% can be high-risk
- Around 10% is considered healthy in many sectors
- 20% or more is strong, depending on industry norms
However, the real benchmark is how your margin compares within your sector and whether it supports your goals.
A good margin should allow you to build financial reserves, reinvest in growth and manage unexpected expenses without destabilising the business.
What is a reasonable profit margin for a small business?
For many UK small businesses, a net profit margin between 7% and 15% is considered reasonable.
Early-stage businesses may operate at lower margins while reinvesting heavily into growth. More established businesses often aim for stronger margins to improve long-term resilience.
Thin margins leave little room for disruption. Unexpected costs — equipment repairs, liability claims, theft or supplier price increases — can quickly strain cash flow.
Building sustainable margins is not just about increasing income — it is about strengthening stability.
How to calculate profit margin
Calculating profit margin is straightforward once your accounts are up to date.
Start by identifying your total revenue for a specific period, such as a month or financial year.
Next, subtract your costs:
- For gross margin, subtract direct production or service costs only.
- For net margin, subtract all business expenses.
Then divide your profit by revenue and multiply by 100.
For example:
Revenue: £50,000
Total expenses: £42,500
Net profit: £7,500
£7,500 ÷ £50,000 = 0.15
0.15 × 100 = 15% net profit margin
Tracking this figure monthly or quarterly allows you to spot trends, adjust pricing strategies and manage costs proactively.
Why profit margin matters for business protection
Healthy profit margins create breathing space.
They allow you to invest in marketing, upgrade equipment, improve customer experience and hire staff. More importantly, they provide a buffer against uncertainty.
Businesses operating on very slim margins are more vulnerable to disruption. A single unexpected event — such as property damage or a liability claim — can significantly impact cash flow.
Strong margins, combined with appropriate business insurance, help ensure that unexpected setbacks do not derail long-term plans.
Final thoughts
Profit margin is one of the clearest indicators of business health.
Revenue tells you how busy you are. Margin tells you how secure you are.
By understanding the difference between gross and net profit margin — and reviewing both regularly — you gain greater control over pricing, costs and long-term strategy.
For small businesses, that knowledge can be the difference between growth that feels good and growth that is sustainable.
Protecting your profit margin with business insurance
Healthy profit margins show your business is running efficiently — but higher profits often come with greater responsibility and risk. As turnover grows, so can your exposure to unexpected costs.
An incident such as equipment damage, theft or a liability claim could quickly reduce the profits you’ve worked hard to build.
Having the right business insurance in place helps protect your income, safeguard your reputation and keep your business trading if something goes wrong.
Protectivity offers business insurance tailored to small businesses and self-employed professionals to help protect your business in the event of an unexpected claim.
Explore the range of policies available and get a quote today to help protect your profits as your business grows.
Get Business Insurance from Protectivity
*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.
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