What is profit margin?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Profit margin is the share of a business's sales that it keeps as profit, worked out by dividing profit by sales for the same period or the same item. Gross profit margin uses gross profit, and net profit margin uses the net profit left after every expense. Because it is measured against the selling price, it differs from mark-up.
A margin turns a profit amount into a share of sales, so it can be compared across periods and products of different sizes. A quiet month and a busy month, or a small product line and a large one, can be set side by side in a way raw profit figures do not allow.
Gross and net margin tell you different things. A gross margin that slips over time often points to prices that have not kept pace with what the business pays for its stock, materials or direct labour. A gross margin that holds steady while the net margin shrinks usually points instead to the running costs that sit below gross profit.
Margin is not the same as mark-up. Mark-up is the amount added to cost to reach the selling price, and it is often expressed as a share of that cost. Reading a mark-up as if it were a margin makes each sale look more profitable than it is.
In Australia
business.gov.au's glossary sends profit margin to its entry for margin, and says margin is generally shown as a gross margin percentage, meaning the share of every dollar of sales that is profit.
Its guides to reviewing your financial health and to the warning signs of financial trouble both name low profit margins. The first lists them among the trends to look for in your financial documents. The second lists them among the signs of a cash flow problem.
Its pricing guide suggests working out what each product or service costs to make before setting a price that leaves you a profit, and getting help from your accountant or a business adviser if you need it.
Worked example
| Item | Amount (AUD) | Share of sales |
|---|---|---|
| Sales | 80,000.00 | 1.00 |
| Cost of goods sold | 48,000.00 | 0.60 |
| Gross profit (gross profit margin) | 32,000.00 | 0.40 |
| Overheads | 24,000.00 | 0.30 |
| Net profit (net profit margin) | 8,000.00 | 0.10 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Treating the mark-up added to cost as the margin, which overstates how much of each sale is profit.
- Comparing one period's gross margin with another period's net margin as if they measured the same thing.
- Looking only at the margin for the whole business and missing a product line that sells on a much thinner margin than the rest.
- Offering a discount without checking what it does to the margin on that sale.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Review your financial health
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Warning signs your business is in financial trouble
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose a pricing strategy
business.gov.au, Australian Government. Current at 16 October 2026, released 1 October 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.