Gross margin is what is left after the direct cost of what you sold. Operating margin is what is left after the cost of running the business. Net margin is what is left after interest, taxes and everything else. Gross margin vs net margin comes down to which costs are counted. Gross margin says whether your pricing and your crews or materials work. Operating margin says whether your overhead fits the business. Net margin says what the owner and the bank get to share. Across US public companies in January 2026 the averages were about 38%, 14% and 10%. Compare against your industry and your own last 24 months.
The three margins on one P&L
Gross margin is revenue minus cost of goods sold, divided by revenue. Cost of goods sold, or COGS, is the direct cost of delivering what you sold: materials, the crew's wages, subcontractors, merchant fees on the sale. It does not include the office.
Operating margin is operating income divided by revenue, where operating income is gross profit minus operating expenses: rent, office payroll, insurance, software, vehicles, marketing, the owner's salary. On a QuickBooks Online P&L this is the Net Operating Income line.
Net margin is net income divided by revenue. Net income is operating income minus interest, taxes booked at the entity, and the other income and expense lines, where the gain on a truck you sold or a bad-debt write-off lands.
A services business with 38 staff billed $3,214,000 last year. Its condensed P&L reads like this.
| Line | Amount | Margin |
|---|---|---|
| Revenue | $3,214,000 | |
| Cost of goods sold | ($2,111,380) | |
| Gross profit | $1,102,620 | 34.3% gross margin |
| Operating expenses | ($778,520) | |
| Net operating income | $324,100 | 10.1% operating margin |
| Interest | ($61,300) | |
| Other expense, net | ($70,800) | |
| Net income | $192,000 | 6.0% net margin |
The bookkeeper's 34% and the CPA's 6% are both right. The 28 points between them are the cost of running the business plus what the bank and the state take.
What belongs in COGS, and why bookkeepers disagree
For a shop that sells goods, COGS is what the goods cost. For a service business it is a judgment, and two bookkeepers will make it differently. One puts crew wages in COGS and office wages in expenses; another puts all payroll in one line because that is how the payroll service exports it. Subcontractors and merchant fees go either way. A 34% gross margin in one file and a 41% in another can describe the same business.
The common failure is a QuickBooks P&L with nothing in COGS at all, which shows a gross margin of 100% and tells you nothing. For tax it does not matter, since net income is the same either way. For running the business, gross margin is the only one of the three that moves early enough to act on, and buried in a single Expenses block you cannot see it move. Getting direct costs into COGS accounts is one of the questions to settle with your bookkeeper, once; the rule matters less than applying it the same way every month.
Gross margin is for pricing and jobs
Gross margin answers whether what you charge covers what it costs to deliver, with room left. Read it by job, by crew, by product line or by location, because that is where it is decided. A landscaping company at 34% overall that runs installs at 41% and maintenance at 22% has a pricing problem in maintenance, and the overall number hides it. For contractors, the job-level version is where the reading gets done.
When gross margin falls, one of three things moved: price, because of discounting; direct cost, because of wages, materials or a job that overran; or mix, because more of the revenue came from the low-margin line. The P&L shows the first two if COGS is split; the third needs revenue by line. Ask which before deciding anything. Each has a different fix.
Operating and net margin are for overhead, the bank and you
Operating margin answers whether the overhead fits. It is the number that goes wrong at around 30 to 50 staff, when the business hires an office manager, a second estimator and a marketing person in the same year, and gross margin holds while operating margin drops from 12% to 6%. It is also the number for the second-location question: a second location adds its own overhead, and if the first location's operating margin does not cover it with room to spare, the first will fund the second for longer than the plan says.
Net margin is what is left to share between you and the bank. It is where a lender starts when computing coverage, where a buyer starts when valuing the business, and the limit on what you can pay yourself over a year, whatever the monthly cash allows. Buyers and lenders often ask for EBITDA margin instead, which adds back interest, depreciation and amortization; EBITDA for a small business covers how and why.
Benchmarks, with the caveat that comes with them
NYU Stern's January 2026 table, compiled by Aswath Damodaran from 5,994 US public companies, is the most complete free set of margins by industry. It is a table of public companies, whose overhead looks nothing like a 40-person private firm's, so read it for shape rather than for targets.
| Industry (US public companies, January 2026) | Gross | Operating | Net |
|---|---|---|---|
| Total market | 37.8% | 14.4% | 9.7% |
| Engineering and construction | 15.5% | 7.0% | 5.9% |
| Homebuilding | 22.7% | 12.9% | 9.5% |
| Restaurant and dining | 32.2% | 17.2% | 9.4% |
| Hotel and gaming | 60.9% | 21.6% | 10.4% |
| Retail, general | 33.2% | 8.2% | 5.6% |
| Business and consumer services | 33.4% | 13.7% | 7.0% |
| Healthcare support services | 12.1% | 3.2% | 1.3% |
| Trucking | 21.2% | 7.3% | 3.8% |
The table moves every year. Vena's February 2026 benchmark page reproduces an earlier Stern set in which engineering and construction shows 13.85% gross and 1.67% net and general retail 3.09% net, so "the benchmark" for retail net margin was 3.1% in one year's table and 5.6% in the next. The rule of thumb that circulates, 20% net is good, 10% average, 5% low, comes from the Corporate Finance Institute by way of Bench and has no industry in it. NetSuite's 2020 guide says many companies target a profit margin of at least 25%, which would put nearly every row of that table below target. We would not use any of these as a goal. Use your own 24 months, and use the table only to check that your gross margin is near your industry's row.
Why the blended margin lies when you own several companies
The $3,214,000 business above is three companies in three files. Company A, installs, had $1,010,000 of revenue at a 52% gross margin. Company B, maintenance contracts, had $1,390,000 at 31%. Company C, a supply yard that sells to the other two and to the public, had $814,000 at 18%. Added together they make 34.3%, which is fine, and none of the three is at 34%. Company C's 18% is a warning the blended number erases.
The management fee makes it worse. Company B charges Company A $84,000 a year for the office it runs for both. That is revenue in B's file at a 100% margin and an operating expense in A's, so B's gross margin reads more than four points better than it is and A's operating margin reads worse. Add the two P&Ls without canceling it and revenue is overstated by $84,000; Company C's sales to A and B are the same problem in COGS. That is the ordinary intercompany arithmetic, and it comes before any group margin means anything. What counts as a good margin is a question about each company, not the total.
Navigator shows gross, operating and net margin per entity and consolidated from each connected QuickBooks Online file each morning, with the recommended KPIs for your industry alongside, so the 18% sits on the same page as the 34%. Canceling the management fee and the yard's internal sales in the consolidated figure is the Pro plan's intercompany elimination.
The method cannot tell you what your margin should be. Nobody's table can. The right gross margin for a maintenance contract in your town is whatever pays a crew, keeps a truck on the road and still clears the overhead below it, and your last 24 months of P&Ls are the only place that is written down.
Questions owners ask
What is the difference between gross margin and net margin?
Gross margin is revenue minus the direct cost of what you sold, divided by revenue. Net margin is what is left after every cost, including overhead, interest and taxes, divided by revenue. A business can have a 50% gross margin and a 3% net margin if overhead eats the difference. Gross margin tests pricing and delivery; net margin tests the whole business, which is why the bank and a buyer read net first.
How do you calculate operating margin?
Operating income divided by revenue. Operating income is gross profit minus operating expenses, before interest, taxes and one-off gains or losses. On a QuickBooks Online P&L it is the Net Operating Income line. A business with $3,214,000 of revenue and $324,100 of net operating income has a 10.1% operating margin, whatever its loan interest and tax turn out to be.
What is a good gross margin?
It depends on what you sell. NYU Stern's January 2026 table of US public companies shows 15% for engineering and construction, 32% for restaurants, 33% for business services and 61% for hotels. Those are large companies with different overhead. For your own business, the better test is whether gross margin held this month against your own last 24 months, and if it fell, whether price, mix or cost moved.
Which margin matters most for a small business?
Gross margin, month to month, because it moves first and you can act on it by repricing or fixing a crew. Net margin, once a year, because that is what you and the bank share. Operating margin sits between them and answers the question most owners ask at 40 staff: whether the office, the trucks and the second manager fit the revenue they support.
Why is my gross margin 100% in QuickBooks?
Because nothing is posted to Cost of Goods Sold. If your bookkeeper categorizes crew wages, subcontractors and materials as ordinary expenses, gross profit equals revenue and the number is meaningless. Ask for direct costs to be moved to COGS accounts, or at least tagged, and the margin you get after that is the one to track. Until then, use operating margin.
Related
For the ranges by industry and what they are worth, read what is a good profit margin for a small business. The three margins are three of the seven in financial KPIs for small business owners, and the report they all come from is explained line by line in how to read a profit and loss statement in QuickBooks.
If you want the margin of each company beside the blended one every morning, the trial connects a QuickBooks Online file in about fifteen minutes and needs no card: navigatorhq.ai.
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Published . Last updated . Reviewed by a CFO on the Navigator team.