Asked what is a good profit margin for a small business, most guides say 10 percent net is average, 20 is good and 5 is thin, and the industry changes the answer. On the NYU Stern data as of January 2026 for US public companies, grocery runs at about 1 percent net, restaurants about 9, engineering and construction about 6 and software about 25. Gross margin is the better early warning, because it should hold steady month to month and a two-point drop is worth a phone call. If you own more than one company, never judge the blended margin; a strong company can carry a failing one for years.
Three margins, one formula each
Gross margin is revenue minus the direct cost of what you sold, divided by revenue. For a restaurant that is food and beverage cost; for a contractor it is materials, subcontractors and field labor; for a consulting firm it is the pay of the people who bill. It is the first line that goes wrong when pricing or purchasing slips.
Operating margin is gross profit minus every operating expense, rent, office payroll, insurance, marketing, software, divided by revenue. It is what the business earns from running, before interest, taxes and the odd items.
Net margin is what is left after interest, taxes, depreciation and everything else, divided by revenue. It is the number the rule of thumb refers to, and it is the least comparable of the three, because it carries the loan you chose, the truck you bought and whatever you decided to pay yourself.
Each one comes off the profit and loss in QuickBooks Online: gross profit divided by total income, net operating income divided by total income, net income divided by total income. The P&L does the subtraction. You do the division. How to read the P&L in QuickBooks shows where the three lines sit and what the layout hides.
The rule of thumb and where it comes from
Nearly every page on this subject says 20 percent is good, 10 percent is average and 5 percent is low. The version most of them are quoting is a March 2022 Bench article, which attributes the figures to the Corporate Finance Institute. It refers to net margin, it is not tied to any industry, and it has no study behind it that we could find. It is still not useless. A business below 5 percent net has no room for one bad quarter, and a business above 20 percent is either in a high-margin trade or is underpaying its owner.
The limit of the rule is that net margin for a private company is a choice as much as a result. Two identical plumbing companies, one paying the owner $180,000 in salary and one paying $60,000 and taking the rest as distributions, show net margins five points apart on the same underlying business.
Margins by industry
The largest public table is the one Aswath Damodaran maintains at NYU Stern, which averages gross, operating and net margin across US public companies by sector. The figures below are from the January 2026 update.
| Sector (US) | Gross margin | Operating margin | Net margin |
|---|---|---|---|
| Total market | 37.8% | 14.4% | 9.7% |
| Software (system and application) | 71.7% | 40.8% | 25.5% |
| Hotel and gaming | 60.9% | 21.6% | 10.4% |
| Machinery | 37.5% | 16.8% | 10.6% |
| Business and consumer services | 33.4% | 13.7% | 7.0% |
| General retail | 33.2% | 8.2% | 5.6% |
| Restaurants and dining | 32.2% | 17.2% | 9.4% |
| Real estate (operations and services) | 32.2% | 4.6% | 1.2% |
| Electrical equipment | 31.8% | 10.9% | 0.9% |
| Building materials | 30.9% | 13.3% | 7.4% |
| Grocery and food retail | 26.3% | 2.6% | 1.3% |
| Homebuilding | 22.7% | 12.9% | 9.5% |
| Trucking | 21.2% | 7.3% | 3.8% |
| Engineering and construction | 15.5% | 7.0% | 5.9% |
| Healthcare support services | 12.1% | 3.2% | 1.3% |
These are public companies, which is the caveat every page that pastes this table leaves out. Public companies pay their executives a salary that sits in operating expenses, and their net margin is after corporate income tax that a pass-through never pays. So a private owner should compare operating margin, computed before their own pay, to the operating column, and treat the net column as a floor rather than a target. A 32-person HVAC contractor at 9 percent operating margin before owner comp is doing better than the engineering and construction line, whatever the net figure says.
Thin margins travel with thin cash. The 2016 JPMorgan Chase Institute study of 597,000 small firms found restaurants held a median 16 days of cash, construction 20 and real estate 47, which is the same ordering as the margin table with the exception of real estate, where the margin is thin but the rent arrives on the first.
Why your number is not comparable yet
Three things need fixing first. Owner pay: if you take distributions rather than a salary, your operating margin is overstated by whatever a manager would cost, and if the S corp pays you well above market it is understated. Put a market salary on the books, or subtract one in your head, before comparing. Cost of goods sold: a QuickBooks Online file where materials, subcontractors and field labor sit in operating expenses rather than in cost of goods sold has a gross margin near 100 percent and an operating margin that is the only usable line. The P&L is correct at the bottom and meaningless in the middle. Other Income: a $41,000 insurance recovery or the sale of a van sits below operating income and belongs in no margin at all. QuickBooks adds it into net income anyway, and a good year that is really a one-off looks like a trend. Gross, operating and net margin takes each of the three apart.
The blended margin
The group made 7.4 percent net last year, the CPA tells its owner. The group is two restaurant locations and a catering and events company, all rolled up into a holding company, and 7.4 is a shade under the restaurant sector and comfortably above the 5 percent the rule of thumb calls thin. Fine, she thinks.
| Company | Revenue | Net income | Net margin |
|---|---|---|---|
| Restaurant, location one | $2,300,000 | $204,700 | 8.9% |
| Catering and events | $1,470,000 | $208,740 | 14.2% |
| Restaurant, location two | $1,010,000 | ($61,610) | (6.1%) |
| Blended | $4,780,000 | $351,830 | 7.4% |
Location two has lost money for two years. The blend never showed it, because the other two companies earn enough to cover a $61,610 loss and still produce a respectable total. That is the problem with a blended margin. It is an average, and an average of two good companies and one bad one looks like three ordinary ones, so nobody goes looking.
Two intercompany items make it worse. The catering company charges each restaurant a management fee for shared kitchen staff, so part of its 14.2 percent is money that came out of the restaurants, and because the fee is set by the owner rather than by a market, the split between the companies is whatever she decided it would be. And location two rents its building from her property LLC at $7,000 a month when the market rate is closer to $9,500, so its 6.1 percent loss is understated by another $30,000 a year. On a consolidated view both items cancel out, which is correct for the group and useless for the decision about location two. Intercompany transactions explains how the fee and the rent should be booked, and 4-wall EBITDA is the per-location measure that strips them out.
What to watch each month
Gross margin by company, as a trend rather than a level. Gross margin in a stable business moves less than a point from month to month, so a two-point drop in one company is worth a phone call to whoever buys the food or prices the jobs, and a two-point drop that persists for a quarter is a pricing problem. Net margin can wait for the quarter. And measure per location and per entity separately: two locations in one QuickBooks file with classes give you a per-location margin only if every bill was tagged, which is worth checking before trusting it.
Navigator reads each connected QuickBooks Online file daily and shows margin per company and consolidated, with recommended KPIs by industry, on the base plan; the blended figure opens to show each company's margin and the entries behind the gap between them. Plans are on the pricing page. What no tool can do is tell you whether a 6.1 percent loss at location two is a bad lease or a bad manager; the KPIs an owner of several companies should watch narrow it down, and managing the finances of several businesses covers the roll-up.
Improving it
Most advice says cut costs first. We would not, at 25 to 50 people, because labor and rent are most of the cost and cutting either usually cuts revenue with it. Price moves first: a 3 percent increase on a business at 8 percent net margin, with no change in volume, is a 37 percent increase in profit, and most customers of a 30-person business do not leave over 3 percent. Mix second: the catering company above earns 14 percent because events carry a higher margin than lunch, and selling more of what earns more is cheaper than selling more of everything. Labor as a percent of revenue third, watched weekly rather than cut once. The honest limit of all three is that they take a quarter or two to show in the numbers, and the table above will not tell you which one is yours.
Questions owners ask
What is a good net profit margin for a small business?
Ten percent is average, 20 is good and 5 is thin, by the rule of thumb most guides repeat from a 2022 Bench article. The industry matters more than the rule: on the NYU Stern January 2026 data, grocery earns about 1 percent net and software about 25. For a private company, compare operating margin before your own pay instead, because net margin depends on how you choose to pay yourself.
What is a good gross profit margin?
It depends on the trade. On NYU Stern's January 2026 figures, engineering and construction averages 15.5 percent gross, restaurants 32.2, hotels 60.9 and software 71.7. The more useful test is stability. A healthy company's gross margin moves less than a point from month to month, so a two-point fall in one month is a signal worth a phone call, whatever the level.
What is the average profit margin by industry?
The NYU Stern table for US public companies, updated January 2026, puts net margin at 9.7 percent across the market, 9.4 for restaurants, 5.9 for engineering and construction, 5.6 for general retail, 3.8 for trucking, 1.3 for grocery and 25.5 for software. Private businesses often run lower on net and higher on operating margin, because owner pay sits differently in the two.
Is a 30 percent profit margin good?
At the net line, 30 percent is exceptional in almost any industry; software averages 25.5 percent and most trades sit under 10. Check what is being measured before celebrating. A 30 percent gross margin is thin for a service business and normal for a contractor, and a 30 percent net margin in a company that pays its owner nothing is a 15 percent margin with an unpaid manager.
How do I calculate profit margin from my QuickBooks P&L?
Run the Profit and Loss report and divide three lines by Total Income: Gross Profit for gross margin, Net Operating Income for operating margin and Net Income for net margin. Before trusting the result, check that direct costs sit in Cost of Goods Sold rather than in expenses, that your own pay is on the books at a market rate, and that Other Income holds nothing that will not recur.
Related
If the three margins are still blurring together, gross margin vs net margin vs operating margin gives each one a job. The numbers themselves come from a report that hides more than it shows, which how to read a profit and loss statement in QuickBooks walks through line by line. And if the losing company is a location rather than a separate entity, 4-wall EBITDA is the measure that finds it. Trades owners will find the industry-specific version in HVAC and electrical contractor profit margins.
The margins above are averages of companies unlike yours; if you want to see your own, per company and together, the trial takes about fifteen minutes to connect and needs no card: navigatorhq.ai.
You're on the list.
The next post goes to . While you wait, the free Accounting Health Check scores your own books.
Published . Last updated . Reviewed by a CFO on the Navigator team.