Net margin is your net profit expressed as a percentage of revenue. It shows what percentage of each sales dollar becomes actual profit after all expenses are paid.
Net margin (or net profit margin) is calculated as Net Profit divided by Revenue, multiplied by 100. It is the most comprehensive profitability ratio because it accounts for all costs including COGS, operating expenses, interest and taxes. A net margin of 15% means you keep 15 cents of every dollar in revenue as profit. Net margin varies significantly by industry - grocery retailers might operate on 1-3% net margins while software companies might achieve 20-30%+. Tracking net margin over time is more important than the absolute number - a declining net margin indicates eroding profitability that needs investigation. Comparing your net margin to industry benchmarks helps you understand how efficiently you operate relative to peers. The gap between gross margin and net margin represents the proportion of revenue consumed by overhead costs, which is useful for identifying opportunities to reduce operating expenses. SortBooks' AI CFO can show your net margin and how it is trending, helping identify the drivers of margin improvement or decline.
SortBooks helps with the bookkeeping behind net margin by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing net margin by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Net profit (also called net income or the bottom line) is your total revenue minus all expenses, including COGS, operating expenses, interest and tax. It is the final profit figure.
Gross margin is your gross profit expressed as a percentage of revenue. It shows what percentage of each sales dollar remains after covering direct costs.
Revenue (also called sales, income or turnover) is the total amount earned from selling goods or services before any expenses are deducted. It is the top line of the P&L.
Profitability measures your business's ability to generate profit from its operations. Key metrics include gross margin, operating margin, net margin and return on equity.
Operating expenses are the day-to-day costs of running your business, excluding COGS. They include rent, wages, utilities, marketing, insurance and administrative costs.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.