How Much Profit Should a Small Business Make?

Profit margins reveal how revenue and expenses shape small business performance across gross, operating, and net benchmarks. See industry averages and strategies to raise margins through cost control, inventory discipline, and stronger cash flow.

By Brad Nakase, Attorney

Email | Call (800) 484-4610

Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. Introduction

2. The primary categories of profit margin

3. What is an SMB’s acceptable profit margin?

4. The industry-specific average profit margin

5. How to Increase Your SMB’s Profits in Five Ways

6. Adjust cash flow to maintain adequate margins

Introduction

Margins of profit matter in every business. You can tell if your business is doing well or not by looking at the relationship between your revenue and expenses.

Smart businesses are also concentrating on their margins in a tougher economic environment when interest rates are still (relatively) elevated, and fewer investors are moving money.

The many profit margin types that companies track are examined in this article. We also look at some benchmark numbers to see what a fair profit margin may be in your sector.

The primary categories of profit margin

Although small business owners often talk about their margin of profit, there are actually multiple variations of this number.

These are the definitions of profit margin that are often used, along with calculations.

Understanding these distinctions is essential before deciding “What is a reasonable profit margin for a small business?”

1. Gross Profit Margin

Your gross profit margin is the amount of money left over after subtracting the cost of goods sold (COGS). It’s basically the profit you make from a product after deducting the particular expenses related to sourcing, manufacturing, and marketing that product.

Because it solely accounts for COGS, the gross profit equation ignores other business expenses like running costs and some employee pay. Without taking into account the overall effectiveness of your company, it’s a useful method of evaluating the possible profitability of particular goods.

2. Operating profit margin

The amount of money left over after subtracting COGS and operating costs is your operating profit margin. Therefore, this covers all of the more general expenses associated with operating your company, not just the cost of purchasing and selling things.

The operating profit margin provides a more accurate picture of your company’s performance because it accounts for these broader expenses. In addition, it’s still quite simple to compute, with possibly less ambiguity than net profit margin, something we’ll discuss next.

What is a reasonable profit margin for a small business? Operating margin provides a more practical benchmark than gross margin.

3. Net profit margin

After subtracting COGS, operating expenditures, interest, and taxes—basically all of your business’s outlays—you obtain what’s known as your net profit margin. Therefore, despite the fact that it can be difficult to assess, this is the most accurate profit indicator.

In certain situations, operating profit margins could be a more practical tool for achieving long-term success. Interest & tax rates are frequently beyond your control and are subject to change. Since operational costs and COGS are mostly dictated by your own procedures, it could be wiser for you to concentrate on lowering them.

Taxes and interest, however, actually lower your gains. Additionally, it’s unlikely that you will completely avoid them; therefore, it’s sensible to think about them.

What is an SMB’s acceptable profit margin?

Your industry, local market, and clientele are the primary determinants of the response to this question. Some fledgling firms are evaluated more on their potential for growth than their existing revenue-to-cost ratio, and they may not even be expected to turn a profit for years.

A decent net profit margin is often thought to be 20%. 10% is a safe and probably sustainable amount, and going much lower can be dangerous.

However, it’s advisable to compare your profit margins to those of comparable companies because these can differ significantly by industry.

The industry-specific average profit margin

Many entrepreneurs ask, “What is a reasonable profit margin for a small business?” The answer depends on more than just total revenue.

To assist you in objectively analyzing your margins, we have a few industry benchmarks based on a continuing NYU study. Despite being unique to the US and probably involving publicly traded corporations, these fairly represent the wide variations across industries.

To put it another way, utilize them as a guide but not as a must for starting a small company of your own.

The real answer to “What is a reasonable profit margin for a small business?” depends on your sector.

Industry	Net Margin	Operating Margin	Gross Margin
Software (system & applications)	19.14%	34.05%	71.52%
Restaurant/dining	10.66%	17.26%	32.43%
Engineering/construction	1.67%	5.02%	13.85%
Retail (general)	3.09%	5.99%	30.86%
Oil & gas	28.26%	38.24%	58.75%
Computer services	4.40%	7.80%	25.52%
Healthcare Products	8.19%	15.58%	55.64%
Retail (automotive)	4.32%	6.44%	21.88%
Entertainment	-0.23%	9.12%	38.09%
Investments & asset management	19.82%	19.30%	66.89%
Food wholesalers	1.21%	2.35%	14.86%
Insurance – General	8.88%	16.35%	33.93%
Software (entertainment)	20.35%	35.36%	63.43%
Advertising	0.89%	12.26%	28.11%
Real estate (general)	16.91%	18.30%	46.70%
Transportation	5.96%	9.31%	25.12%
Beverage (soft)	13.73%	19.83%	54.52%
Business & consumer services	5.45%	12.48%	33.50%
Farming/Agriculture	7.12%	10.40%	16.49%
Retail (distributors)	7.55%	12.34%	32.34%
Beverage – alcohol	8.59%	21.20%	45.25%
Packaging & containers	2.85%	10.16%	21.71%
Information services	3.49%	13.03%	32.72%

Averaging 36.56% for gross profit margin, 12.97% for operating margin, and 8.54% for net margin, the average overall margin was impressive. This illustrates the impact that taxes, interest, and operating costs can have.

Around 30% was the largest net profit margin for banks & money centers. Railroads, tobacco, and oil/gas exploration were also quite profitable, this study found.

Unbelievably, the software (internet) industry has a net profit margin of -14.32% and gross margins of around 60%. This is probably because of the recent rapid expansion in the tech sector, where businesses have been investing heavily in debt and equity. The items themselves are inexpensive to create, with minimal overhead, but because of the fierce competition in the market, businesses decide to invest more in order to gain an advantage.

All in all, these offer a fascinating perspective on how net margins and gross margins can differ greatly. In those 24 sectors, they also provide a general idea of what acceptable profit margins look like.

If the profit ratio is below average or you’re not satisfied with it right now, what can you do?

How to Increase Your SMB’s Profits in Five Ways

Increased revenue at a comparable cost or decreased costs are the two main strategies for increasing profit margins. These five ideas will help you do that.

Identify and eliminate wasteful practices at work

Many companies, if they just took a hard look, could find cost savings, even in areas where you really can’t save. Those are the toughest calls, but those we’ll get to. This is about identifying the clever ways to streamline your operations and get rid of unnecessary excess.

The following are common SMB inefficiencies:

Hoarding an excessive amount of goods or materials that don’t sell well or at all
Handling consumer orders, shipping, or mail by hand when these processes could be done by machine.
Being charged late fees, interest, or penalties on bills or obligations not paid
Employing too many people
Sluggish supply chains and delays
Slow check-out times or lengthy lineups are examples of inefficient customer experiences that drive customers to shop elsewhere.
Concerns about security (such as internet fraud and cyberattacks)

A significant victory is any increase in efficiency that results in lower operating costs or higher income.

Exercise rigorous inventory management

The goal of inventory management is to identify the ideal inventory level to maintain. This is involved with:

Keeping resources accessible and not overstocking
Having enough inventory to meet the actual demand

Until the stock is sold, it is plainly a cost. You will never recover that expense, and your margin of profit will decrease if it stays unsold indefinitely.

Keeping inventory comes with storage expenses. There may be opportunity costs associated with investing your money in unsold merchandise.

You need precisely the proper amount of inventory if you want to optimize sales and minimize expenses. Being deliberate & concentrated in this exercise is the only true way to achieve this difficult balance.

To obtain the goods you require right now without committing necessary dollars, think about inventory finance if funding is a concern. Even if you lack the funds to buy the items you require, you can still benefit from a recent increase in demand thanks to this short-term financing.

Pay attention to extra profitable products

This is a no-brainer, yet not all small businesses are aware of their most profitable goods right away. This is the benefit of accurately including all of the expenses associated with each individual item in the COGS calculation.

Whole product or service categories may be more profitable than others, contingent upon your business style and industry. It’s also possible that some of your products perform better than others in the spectrum.

It’s possible that the study will reveal really lucrative products that aren’t selling as well as you’d want. This might be an absence of demand, in which scenario, there’s no need to pay attention to them. But purchasers’ ignorance can also be the cause. Your best-selling products must be prominently displayed in your storefront & on the website.

Reduce expenses

Cutting core expenses and lowering inefficiencies, or “reducing the fat,” are philosophically different. However, if the margins for profit aren’t there, you will eventually be unable to continue spending the way you are.

The most evident instances of cost-cutting are:

Reducing the number of employees
Cutting back on the number of your physical sites or branches
Eliminating some benefits and perks for employees
Setting a limit on trading hours

They’re all painful. It goes without saying that you ought to begin with “unnecessary” expenses and luxuries (your inefficiencies) before focusing on actual locations and individuals.

Enhance the collections

The amount of time it takes to get paid is an essential variable and is often referred to as DSO (Days Sales Outstanding). Your May margins can be lower than you would want if, for instance, you are examining profit margins for May and the majority of your customers do not pay until July.

Although more complex accounting takes this into account, we like to keep things straightforward. Purchases made today should, if at all possible, generate new revenue tomorrow rather than the following month or quarter. The more working cash you have accessible and the more prosperous your business seems, the shorter the payment cycles are.

At a deeper level, however, you must make sure that each and every client pays. Complete and on schedule. Any resources you use to pursue payments are inefficient as well and will negatively impact your earnings.

Seek out simple and convenient methods to encourage them to pay. Additionally, take into account whether receivables finance or buy now pay later solutions could facilitate client payments and maintain cash flow into your accounts.

Adjust cash flow to maintain adequate margins

It’s not always simple to implement suggestions to increase profit margins. Naturally, you would have taken advantage of a straightforward approach to increase sales or reduce your costs by now.

However, managing cash flow is one aspect of small business operations that is sometimes disregarded. This is the procedure to make sure that funds enter and exit your company effectively, consistently, and that lacking access to finance is never a hindrance.

For cash flow, short-term funding may be essential. The impact of having a direct route to secure, adaptable, and long-term finance is significant.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment

Most recent blogs:

The Most Common Types of Business Organizations in The United States

Compare common U.S. business organization types, from sole proprietorships and partnerships to LLCs, corporations, nonprofits, and cooperatives. See how taxes, liability, ownership, and funding can shape the right structure for a new business.

Types of Adaptability Skills You and Your Team Need

Adaptability skills help professionals adjust to workplace changes, solve problems, communicate well, and work with teams across shifting roles. This article covers key adaptability skills, workplace examples, and ways to present those strengths on your resume.

Does a Verbal Agreement Count as a Contract?

Find out when verbal agreements are legally binding in California and what courts review to enforce them. Review Statute of Frauds rules, exceptions, and why written contracts offer stronger proof and protection.

How Much Profit Should a Small Business Make?

What is ROI? How to Calculate Return On Investment

Return on investment (ROI) measures profit compared to cost and is expressed as a percentage for easy comparison. This guide explains the ROI formula, examples, benefits, limits, and how industries and investors evaluate performance.

What is the Definition of Gross Income in Business Finance?

Gross income in business finance refers to total revenue minus cost of goods sold before taxes and other expenses. This guide explains calculation methods, key differences from net income, and examples for individuals and companies.

What Does EBITDA Mean?

EBITDA measures operating profitability by excluding interest, taxes, depreciation, and amortization to highlight core business performance. Review formulas, examples, comparisons with EBIT and EBT, along with criticisms and practical business context.

Holder In Due Course: Meaning, Rights, Limits, and Examples

Holder in due course covers definition, key rights, limits, and enforcement rules for checks and promissory notes. See consumer protections, the FTC Holder Rule, and practical examples showing when HDC status applies.

Do I Need a Permit to Operate a Vending Machine?

This article explains permits, licenses, taxes, and placement rules for operating vending machines in California businesses and public locations. It covers compliance duties, ADA access, school and property requirements, budgeting basics, and marketing considerations for vending operators.

Open A Restaurant Checklist: California Licenses and Permits (2026)

This California restaurant opening checklist covers permits, health inspections, labor rules, and 2026 wage changes affecting new food businesses. It helps owners avoid shutdowns, control costs, and build a compliant restaurant brand in one of the nation’s toughest markets.

Unruh Act Definition: California Website Accessibility Law

California’s Unruh Civil Rights Act can trigger $4,000 statutory damages per access barrier on inaccessible websites. See how it ties to ADA claims, why intent doesn’t matter, and steps to meet WCAG 2.1 AA.

Merger and Acquisition Due Diligence Checklist

Merger & Acquisition M&A Due Diligence Checklist

M&A due diligence checklist covering financials, contracts, IP, cybersecurity, tax, and regulatory risks before signing a merger or acquisition. Includes who leads diligence, what documents to request, red flags to spot, and how findings shape negotiations and integration.

Who Has More Right - A Trustee Or The Beneficiary

Who Has More Rights a Trustee Or The Beneficiary?

This article explains trustee and beneficiary roles, comparing rights, duties, and limits within trusts and living trusts. It covers fiduciary duties, removal options, shared roles, and tips for choosing and supervising trustees.

Can you change the name of your LLC?

Change your LLC name by filing a Certificate of Amendment and updating records with the state, IRS, and FinCEN. Update bank accounts, permits, contracts, vendors, and marketing materials, or use a DBA for a faster public-name switch.

Liquidated Damages Clause: What Is It, And Is It Enforceable?

Liquidated damages clauses set a preset breach amount, so California contracts can limit fights and settle faster when losses are uncertain. Courts enforce them only when the figure is reasonable, triggers are spelled out, and the clause compensates rather than punishes.

Restaurant Surcharge California: New Rules and Menu Disclosure Requirements

California restaurant surcharge rules cover SB 1524, backlash over surprise fees, and required menu disclosures for service charges. From July 1, 2025, fees must be shown wherever prices appear, including online menus, or restaurants risk costly lawsuits.

Restaurant Service Charge California: SB 478 Rules for Junk Fees, Automatic Gratuities, and Menu Pricing

Get up to speed on California SB 478, junk fees, restaurant service charges, and new menu pricing rules. See how automatic gratuities and mandatory fees must be advertised to comply, reducing hidden costs and lawsuit risks.

Elements of Libel: Definitions, Proof, and Legal Standards

Libel involves proving false published statements that harm reputation, with specific legal elements and defenses recognized under California law. This guide outlines definitions, proof requirements, statutory rules, and court interpretations shaping successful or failed libel claims.

SB 478: California Law Bans Hidden Fees in Advertising

California SB 478 bans hidden fees in advertising, requiring upfront disclosure of all mandatory costs for products and services. The law, effective July 1, 2024, applies to most businesses serving California customers, with limited exceptions for taxes and shipping.

Compliance Strategy: A Practical Guide to Building, Automating, and Managing Regulatory Requirements

A compliance strategy strengthens risk management, improves efficiency, and supports regulatory requirements through clear policies, audits, and staff training. Tools like Sprinto, Secureframe, and Vanta automate monitoring, evidence gathering, and vendor management for stronger compliance programs.

How to Hire a Lawyer in California: Step-by-Step Instructions

Hiring the right lawyer in California involves knowing your needs, checking qualifications, and reviewing fees before making decisions. This article outlines attorney types, fee structures, deadlines, and key questions to ask before signing any agreement.

What Are the 5 Elements of Defamation in California?

Defamation claims in California require five legal elements including falsehood, public exposure, identification, harm, and the defendant’s fault. Real examples highlight how reputations, jobs, and legal outcomes are affected when defamatory statements meet these conditions under state law.

Comprehensive Guide to California Employment Law: Rights, Rules, and 2025 Updates for Employers and Employees

California’s 2025 employment law updates address at-will status, contracts, workplace leave, wage rules, and discrimination protections. This overview covers employer duties and employee rights on sick leave, terminations, drug policies, family care, and work conditions.

LLC versus Corporation: Key Differences, Tax Impacts, Ownership Structures, and Management Considerations

Choosing between an LLC and a corporation affects ownership, taxes, management responsibilities, and liability protections for your business structure. Compare differences in formal requirements, legal treatment, and funding opportunities to select the best option.

Longshoreman Providers: FAQ for Maritime Employers

Best Free Payroll Software for Small Businesses and Startups in 2025

Find the best free payroll software options for small businesses and startups in 2025 with essential tools and flexible features. Compare user-friendly platforms offering global payments, tax calculations, employee portals, and cloud access at no cost.

What Services Does a California Business Lawyer Provide?

A California business lawyer helps protect your company by providing legal guidance on structure, taxation, contracts, and compliance. Their services ensure you avoid costly mistakes and navigate disputes, allowing you to focus on growth.

Where Can I Find a Business Lawyer?

Find a skilled business lawyer to navigate legal matters like contracts, trademarks, and liability issues. Protect your company with expert legal advice and support.

What Are the Requirements for a Business Contract Termination Letter?

A contract termination letter must clearly state the reason for termination, reference the original contract, and follow required notice procedures. Ensuring proper documentation and adherence to contract terms helps prevent legal disputes and wrongful termination claims.

Are Verbal Contracts Binding in California?

A verbal contract can be legally binding in California, but proving its terms in court is often difficult. Written agreements provide stronger legal protection, reducing risks of disputes and misunderstandings.

See all blogs: Business | Corporate | Employment

2,277

How Much Profit Should a Small Business Make?

Introduction

The primary categories of profit margin

What is an SMB’s acceptable profit margin?

The industry-specific average profit margin

How to Increase Your SMB’s Profits in Five Ways

Adjust cash flow to maintain adequate margins

Free Consultation