Profit Margin Calculator United Kingdom 2026-27
Gross margin, markup, gross profit per unit and net margin from VAT-exclusive turnover, cost of sales and overheads — with Corporation Tax at the 25% main rate (19% small profits rate under £50,000, marginal relief to £250,000) and a typical UK sector margin as the comparison.
Gross profit is turnover less cost of sales, both entered without VAT (output VAT is owed to HMRC, never part of turnover).
| COGS | £65,000.00 |
|---|---|
| Gross Profit | £35,000.00 |
How the profit margin works
Gross profit is turnover less cost of sales, both entered without VAT (output VAT is owed to HMRC, never part of turnover). Gross margin is gross profit as a share of turnover; markup is gross profit as a share of cost — the same pounds, two denominators. Net profit takes overheads off gross profit and the net margin is that share of turnover. The after-tax line applies the Corporation Tax rate you enter: 19% at the small profits rate below £50,000 of profit, 25% at the main rate above £250,000, and an effective rate in between under marginal relief. A sector benchmark for the UK comes from the ONS Annual Business Survey and trade bodies rather than a single tax-office table.
Formula: Gross profit = revenue − COGS · margin = GP ÷ revenue · markup = GP ÷ COGS · net = GP − OpEx · after tax = net × (1 − rate)
UK Profit Margin Notes
UK margin checks often need to separate VAT from usable revenue, then include stock, delivery, payroll, National Insurance, rent, software, and card fees.
Use this version to compare markup, gross margin, and net margin before changing prices, supplier terms, or staffing levels.
UK-specific treatment for profit margin: figures are framed in pounds, with British household or business wording and the assumptions commonly seen in PAYE, HMRC, mortgage, pension, and consumer-credit contexts.
Watch for UK markers in the page copy and inputs: HMRC, PAYE, National Insurance, pension contributions, stamp duty land tax, miles, APR, part-exchange, council tax, VAT, and GBP-based totals.
The result should be read as a United Kingdom estimate, so compare it with UK provider quotes, HMRC or GOV.UK guidance, lender affordability rules, devolved-nation differences, or regulated advice where needed.
Gross margin = (Revenue − COGS) ÷ Revenue. Net margin includes all costs and tax.
Gross margin by industry Net margin by industry Margin improvement levers All calculations run 100% in your browser. The calculator code does not submit your figures to GlobalCalc to obtain a result. Understanding your resultSelect the question that matches where you are right now.
Use this calculator to plan and model your financial situation.
How to use this resultCompare scenarios by adjusting inputs. Use the precision bar to reveal more detail. Results update in real time as you type.
What it is notNot professional financial advice, not a guarantee of any specific outcome, and not a substitute for qualified advice for significant decisions.
AccuracyAll calculations run entirely in your browser using standard formulas. The calculator code does not submit your figures to GlobalCalc to obtain a result.
The inputs that most influence this result are shown in the breakdown above. Even small changes to key variables can have a significant compound effect over time.
Time is the most powerful variableLonger periods amplify both growth and cost. Starting one year earlier or later can change a financial outcome by more than you expect.
Rate sensitivityEven a 1% change in rate can materially change the outcome over a long period. Use Standard or Advanced mode to model rate sensitivity.
Compound effectsMost financial variables have a non-linear relationship with the result — they compound. The sensitivity table in Advanced mode shows this clearly.
To improve this result, focus on the inputs with the highest leverage. Small changes to the right variable often produce much larger outcomes than large changes to less important ones.
Find the binding constraintAdjust inputs one at a time. The one that moves the result most is your binding constraint — focus effort there first.
Compare scenariosUse the Scenario A/B feature in Advanced mode to compare two situations side by side.
Time your actionsMany financial decisions benefit from timing. Starting earlier, fixing a rate at the right moment, or clearing a debt before applying for new credit can each produce significant improvements.
Depending on what you are planning, these are the natural next steps after reviewing this result.
Check the full pictureThis calculator shows one part of a financial decision. The related calculators below help you model adjacent factors.
Model different scenariosSwitch to Standard or Advanced mode and use the scenario comparison tool to model best, expected, and worst case.
Get professional adviceFor decisions involving significant amounts of money, use this result as a starting point for a conversation with a qualified financial advisor.
Related calculators Break-EvenRelated calculator ROI CalculatorRelated calculator Budget SurplusRelated calculator Pay RiseRelated calculator CGT CalculatorRelated calculator 🍸Bar Pour CostPour cost and GP% How it works How it worksHow gross margin, net margin, and EBITDA are calculated
The three profit margin types
Gross margin = (Revenue − COGS) ÷ Revenue × 100. Net margin = Net profit ÷ Revenue × 100. EBITDA margin = EBITDA ÷ Revenue × 100. Each measures profitability at a different stage of the income statement.
| Margin type | What it excludes | What it measures |
|---|---|---|
| Gross margin | COGS only | Core production profitability |
| Operating margin | COGS + operating expenses | Business efficiency before finance |
| EBITDA margin | COGS + opex (excl D&A) | Cash generation proxy |
| Net margin | Everything (incl tax) | Overall profitability |
UK profit margin checks by sector
UK margin work should separate VAT from usable revenue, then compare gross margin, operating margin, and net margin against the economics of the specific sector. A cafe, consultancy, trades business, SaaS company, and online retailer can all be healthy at very different percentages.
| UK business type | Margin pressure to test | Useful local check |
|---|---|---|
| Hospitality and cafes | Food cost, rent, energy, card fees, wage cover | VAT treatment, tips policy, delivery-app commissions |
| Trades and construction | Materials, subcontractors, rework, van and tool costs | Quote contingency, CIS deductions, payment timing |
| Professional services | Billable utilisation, partner time, software, insurance | Day-rate recovery and debtor days |
| Online retail | Returns, fulfilment, marketplace fees, paid ads | VAT, shipping recovery, stock write-downs |
| SaaS or digital products | Support load, hosting, acquisition cost, churn | MRR retention and customer payback period |
For UK decisions, a strong gross margin is only useful if it survives VAT handling, payroll, rent reviews, card fees, finance costs, and corporation tax. Use the calculator to model pounds kept per sale, not just the headline percentage.
Gross vs net marginUnderstanding gross margin vs net profit margin
Gross margin — production efficiency
Gross margin measures how efficiently your core business produces revenue after direct costs. It excludes overheads (rent, marketing, management salaries). A high gross margin gives you room to cover overheads and generate profit. A low gross margin means even small overhead increases can push you into loss.
Net margin — bottom-line efficiency
Net margin shows what percentage of revenue becomes actual profit after all costs including tax. A 10% net margin means you keep £10 of every £100 in revenue. Businesses can be high-revenue but low net margin (grocery retail at 2–4%) or low-revenue but high net margin (successful SaaS at 20–30%).
Why gross margin is more useful for operations
Management teams focus on gross margin because it reflects the underlying product/service economics — what is controllable. Net margin includes capital structure decisions (interest expense), accounting choices (depreciation), and tax — which are less relevant to day-to-day operational management.
Improving marginHow to improve your profit margin
Raise prices
The highest-leverage action is raising prices. On a 30% gross margin, a 5% price increase with 0% volume loss improves gross margin to 35% and net profit by approximately 50%. Many businesses under-price because they fear losing customers — but most customer relationships are more price-tolerant than owners believe.
Reduce COGS
Negotiate better supplier terms, increase order volumes, find alternative suppliers, reduce waste, and improve production efficiency. Each 1% improvement in gross margin flows directly to net profit.
Reduce fixed overhead
Fixed costs (rent, software, permanent staff) are easiest to reduce through renegotiation, subletting, or consolidation. Unlike variable costs, reducing fixed overheads improves margins at all revenue levels.
Pricing strategyCost-plus vs value-based pricing for UK businesses
Cost-plus pricing
Cost-plus pricing sets price as: total cost per unit + desired margin. Simple and ensures profitability per unit. Disadvantage: ignores what the market will pay — you may leave money on the table or price yourself out of the market.
Value-based pricing
Value-based pricing sets price based on the value delivered to the customer, not your costs. A management consultant who saves a client £500,000 can charge £50,000 regardless of their cost to deliver the engagement. This approach produces the highest margins for differentiated products and services.
Competitor-based pricing
Setting prices based on what competitors charge is common in commoditised markets. The risk: if you have higher costs than competitors, you will not achieve the same margins. Focus on competing on value, not price, wherever possible.
FAQFrequently asked Frequently asked questions
Where these figures come from
Business figures on this page are drawn from HM Revenue & Customs (corporation tax, VAT, PAYE), Companies House (company registrations), and GOV.UK (statutory employer and business obligations).
- Corporation Tax rates — GOV.UK — Corporation Tax rates and reliefs.
- VAT rates (standard 20%) — GOV.UK — VAT rates.
- PAYE & employer obligations — GOV.UK — PAYE and payroll for employers.
- Company registration & filing — Companies House — GOV.UK.
- Business rates — GOV.UK — Business rates.
Last checked: April 2026. Rates and thresholds are reviewed against the source of record each November, when annual adjustments for the following tax year are published.
You might also be interested in Break-EvenRelated calculator ROI CalculatorRelated calculator Budget SurplusRelated calculator Pay RiseRelated calculator CGT CalculatorRelated calculator Rate this calculatorQuick answers
UK retail gross margin ~40–60% typical
UK retail businesses typically achieve 40–60% gross margin — meaning for every £100 in revenue, £40–£60 covers costs of goods sold, leaving £40–£60 to cover overheads and profit.
| Gross margin range | 40–60% |
|---|---|
| Net margin (after overheads) | 3–10% |
| Largest overhead | Rent (10–15% of revenue) |
| Staff costs | 15–25% of revenue |
| Best performers | Private label, low-cost ops |
| Benchmark: value retailer | ~35% gross, ~5% net |
- Raise price 5% Gross margin improves significantly
- Private label vs branded Private label: higher margin
- Online vs physical Online often higher net margin
- Shrinkage management Impacts gross margin directly
- Inventory turns Higher turns = less working capital
Software/SaaS gross margin 70–90%
Software and SaaS businesses achieve gross margins of 70–90% — the highest of all business types. After the initial development cost, each additional customer has minimal COGS.
| Gross margin range | 70–90% |
|---|---|
| Why so high? | Near-zero COGS for each new user |
| Net margin range (startup vs mature) | −20% to +30% |
| Key costs | R&D, customer success, AWS/Azure |
| Benchmark (listed SaaS companies) | 65–80% gross margin average |
| Rule of 40? | EBITDA% + growth% > 40% |
- COGS includes hosting? Yes — AWS/GCP is COGS
- Net margin sacrifice for growth Common — invest in sales/marketing
- Unit economics: CAC vs LTV LTV:CAC ratio > 3 is healthy
- Churn impact on LTV 1% monthly churn = 12% annual
- Gross margin retention Expansion revenue improves this
Café gross margin — 65–75% Gross margin before rent and staff
Cafés achieve 65–75% gross margin on food and beverage sales — one of the higher gross margins in retail. However, net margins are 3–8% due to high rent, labour, and utilities costs.
| Gross margin range | 65–75% |
|---|---|
| Net margin range | 3–8% |
| Coffee: typical margin | ~80% gross on coffee |
| Food items | ~60–70% gross |
| Key cost: rent | Often 10–15% of revenue |
| Key cost: labour | Often 30–35% of revenue |
- Upsell high-margin items Coffee, bottled water, pastries
- Reduce waste Affects gross margin directly
- Catering orders Higher revenue, similar margin
- Weekend vs weekday revenue Optimise staffing to match
- Review COGS quarterly Supplier prices change
Gross vs net margin — understanding the difference Before vs after overheads
Gross margin measures profitability after direct production costs (COGS) only. Net margin measures profitability after all costs including rent, salaries, marketing, and tax. A business can have high gross margin but low net margin.
| Gross margin formula | (Revenue − COGS) ÷ Revenue |
|---|---|
| Net margin formula | Net profit ÷ Revenue |
| High gross, low net example | SaaS: 80% gross, 15% net |
| Low gross, low net example | Grocery: 25% gross, 3% net |
| Which matters operationally? | Gross — reflects product economics |
| Which matters for overall health? | Net — the actual profit |
- High gross margin gives flexibility Room to cover overhead growth
- Gross margin benchmarking Compare to industry peers
- COGS reduction strategy Negotiate suppliers, reduce waste
- Overhead optimisation Rent, staff, software audits
- Price increase impact Most direct gross margin improvement
EBITDA margin — what it means 10–20% is healthy for most businesses
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margin removes financing and accounting decisions to show underlying business profitability. For most UK businesses, 10–20% EBITDA margin indicates a healthy business.
| EBITDA margin formula | EBITDA ÷ Revenue × 100 |
|---|---|
| Healthy benchmark | 10–20% for most sectors |
| SaaS typical EBITDA | 20–40% |
| Hospitality typical EBITDA | 8–15% |
| Retail typical EBITDA | 4–10% |
| Used for | Business valuation multiples |
- EBITDA multiple for valuation Often 4–8× EBITDA for SME sale
- Improve EBITDA: gross margin Direct pass-through
- Improve EBITDA: fixed overhead Reduce without revenue impact
- EBITDA vs net profit? EBITDA used in most M&A deals
- Rule of 40 (SaaS) EBITDA% + growth% > 40%
Trades gross margin — plumbing, electrical 35–50%
Trades businesses (plumbing, electrical, building) typically achieve gross margins of 35–50%. The gross margin covers labour, materials, and direct job costs. Net margins are 8–15% after overheads.
| Gross margin range | 35–50% |
|---|---|
| Revenue split | Labour + materials |
| Net margin typical | 8–15% |
| Key cost | Materials and direct labour |
| Benchmark | Good trades: 45%+ gross margin |
| Comparison to services | Lower than pure services — materials drag |
- Improve by quoting accurately Scope creep hurts margins
- Materials markup Mark up materials at 15–25%
- Labour rate review Annual rate review essential
- Subcontractor cost Can be lower or higher than own labour
- Quote-to-job review Track actual vs quoted for every job
Retail gross margin — fashion, homewares 50–65%
Fashion and homewares retailers typically achieve gross margins of 50–65%. Online retailers often achieve higher margins than bricks-and-mortar. Net margins are 3–8% after rent, staff, and marketing.
| Gross margin range | 50–65% |
|---|---|
| COGS | Wholesale product cost |
| Net margin typical | 3–8% |
| Key overhead | Rent (10–15% of revenue) |
| Online vs physical | Online typically 5–10% higher net |
| Markdown impact | Sales reduce GM — track carefully |
- Keystone markup? 100% markup = 50% gross margin
- Reduce markdowns Better buying, seasonal management
- COGS negotiation Volume or loyalty discounts?
- Dead stock management Clearance vs margin destruction
- Private label? Higher GM on own brand
Grocery / food retail gross margin 20–30%
Grocery and food retail operates on gross margins of 20–30% — significantly lower than most other retail. Volume is the key driver. Net margins are only 1–4%.
| Gross margin range | 20–30% |
|---|---|
| High volume? | Yes — turnover is the model |
| Net margin range | 1–4% |
| Major players (Tesco, Asda) | ~25% gross margin |
| Why so low? | Low mark-up, high perishable waste |
| Private label impact | Higher margin on own-brand products |
- Volume management Inventory turnover is critical
- Waste reduction Major profit lever for fresh food
- Private label proportion Growing — higher GM
- Supplier negotiation Cost reduction = direct GM gain
- Shrinkage (theft/damage) Direct hit to gross margin
E-commerce gross margin 50–75%
E-commerce businesses typically achieve gross margins of 50–75%, higher than physical retail due to no shopfront rent. However, customer acquisition costs (CAC) and returns often reduce net margins to 5–15%.
| Gross margin range | 50–75% |
|---|---|
| No shopfront rent? | Yes — GM advantage vs physical |
| Key cost difference | Fulfilment, returns, CAC |
| Net margin range | 5–15% |
| Returns impact | Fashion: 20–35% return rate |
| CAC range | £20–£150 per customer |
- Returns policy optimisation Reduce returns without hurting conversion
- CAC vs lifetime value LTV must exceed CAC by 3×
- Repeat customer rate Email/loyalty key to profit
- Fulfilment costs 3PL vs in-house trade-off
- COGS vs marketing trade-off Many E-com brands are marketing-heavy
Professional services gross margin 70–85%
Professional services (accounting, law, consulting, design) achieve gross margins of 70–85% — among the highest of any industry. The primary COGS is the cost of professional staff time.
| Gross margin range | 70–85% |
|---|---|
| Primary COGS | Billable staff cost |
| Net margin range | 15–30% |
| Key metrics | Utilisation rate + billing rate |
| Overhead drivers | Rent, admin, software, PII insurance |
| Sole practitioner advantage | COGS = your own time |
- Improve utilisation rate Target 70–75% billable hours
- Value-based vs hourly billing Value billing captures more margin
- Delegate low-value work Use junior staff for routine tasks
- Fixed-fee packages Predictable revenue + scope control
- Benchmark billing rate Review annually against competitors
Healthcare/allied health gross margin 55–70%
Healthcare and allied health practices (physiotherapy, dentistry, psychology, chiro) achieve gross margins of 55–70%. Net margins are 15–25% for well-run practices.
| Gross margin range | 55–70% |
|---|---|
| COGS | Direct practitioner cost + consumables |
| Net margin range | 15–25% |
| Billing factor | NHS/private fee timing |
| Rent | Medical suites: expensive |
| Key performance metric | Patient visits per hour |
- Mixed billing model NHS + private fee mix
- Appointment optimisation No-shows and short gaps are costly
- Practitioner retention Key person risk in small practices
- Allied health vs medical Different margin profiles
- Telehealth? Lower overhead, different billing rates
Café net margin — 3–8% typical After rent, staff, COGS
Despite high gross margins (65–75%), cafés achieve net margins of only 3–8% because of the dominance of rent, labour, and utilities. A café doing £500,000/year in revenue at 5% net earns only £25,000.
| Net margin range | 3–8% |
|---|---|
| Revenue £500k/year at 5% net | £25,000 profit |
| Key cost: rent | Often 10–15% of revenue |
| Key cost: labour | 30–35% of revenue |
| Key cost: COGS | 25–35% of revenue |
| High volume required | Small margin × large volume = profit |
- Rent-to-revenue ratio Target below 10%
- Wage management Roster carefully to busy periods
- High-margin items Coffee, bottled drinks, pastries
- Catering/events? Higher margin opportunity
- Review regularly Small % improvement = big impact in pounds
Trades net margin — 8–15% typical After all overheads
Trade businesses achieve net margins of 8–15%. This reflects the gross margin (35–50%) minus overheads: vehicle costs, insurance, admin, tools, and apprentice wages.
| Net margin range | 8–15% |
|---|---|
| On £500k revenue at 10% | £50,000 net profit |
| Major overheads | Vehicle, insurance, tools, admin |
| Apprentice cost | Short-term cost, long-term asset |
| Comparison to services | Lower — materials and equipment drag |
| Best performers | 15%+ via quoting discipline |
- Overhead review Vehicle costs often underestimated
- Quote accuracy Real job cost tracking
- Materials markup Markup to 15–25% above cost
- Payment terms 30+ day receivables hurt cash flow
- Specialisation premium Niche trades command higher rates
Retail net margin — 3–8% Thin but achievable
Physical retail net margins average 3–8%. Online retail typically achieves 5–15%. The thin margins mean expense control and inventory management are critical.
| Net margin range (physical) | 3–8% |
|---|---|
| Net margin range (online) | 5–15% |
| Major overheads | Rent (10–15%), staff (20–25%) |
| On £1M revenue at 5% | £50,000 net profit |
| Scale is needed | £5M revenue × 5% = £250k profit |
| Online vs physical advantage | Online avoids £150k–£300k/year rent |
- Reduce dead stock Inventory management = margin protection
- Move to online Reduces rent and sometimes staffing
- Increase average order value Cross-selling, bundling
- Loyalty programs Repeat customers are 5× cheaper than new
- Review pricing annually Even 5% price increase = large net margin impact
Professional services net margin — 15–30% High margin, low capital required
Professional services achieve net margins of 15–30% — one of the best net margin profiles of any industry. Low capital requirements and high intellectual leverage drive strong profitability.
| Net margin range | 15–30% |
|---|---|
| Revenue £500k/year at 20% | £100,000 net profit |
| Major overhead | Rent, insurance, admin staff |
| Capital requirements | Very low — primarily human capital |
| Key risk | Key person dependency |
| Best performers | 30%+ with value billing |
- Value-based billing Capture more margin per engagement
- Leverage with junior staff Charge senior, deliver junior
- Templates and systems Reduce time on routine work
- Subscription/retainer model Predictable, higher-margin revenue
- Specialisation Command premium rates in a niche
E-commerce net margin — 5–15% Highly variable — CAC is the challenge
E-commerce businesses achieve net margins of 5–15%, with significant variation. Strong brands with repeat customers achieve 15%+; acquisition-dependent brands often operate below 5% or at a loss.
| Net margin range | 5–15% |
|---|---|
| Typical split: GM − CAC − ops | 70% − 30% − 20% = 20% est. |
| Customer acquisition cost | Often £30–£150 per customer |
| Repeat purchase rate | Critical for profitability |
| Returns drag | Fashion: can reduce net margin by 5–10% |
| Best performers | 15%+ with strong brand loyalty |
- LTV:CAC ratio Must be above 3 for sustainability
- Email marketing ROI Highest ROAS for repeat customers
- Returns reduction Address root cause, not just policy
- Subscription model Predictable, high-margin revenue
- CAC payback period Target < 12 months
SaaS/software net margin — varies widely Startup: negative; Mature: 15–30%
SaaS net margins range from deeply negative (early-stage) to 15–30%+ for mature profitable companies. Most public SaaS companies sacrifice net margin for growth rate in their early years.
| Early-stage SaaS | Often −20% to −100% (investing in growth) |
|---|---|
| Growth-stage SaaS | −10% to +10% |
| Mature profitable SaaS | 15–30%+ net margin |
| Gross margin (all stages) | 70–90% |
| Rule of 40 | Growth% + EBITDA% > 40% |
| Key driver | Churn rate + expansion revenue |
- Path to profitability When CAC payback < 12mo + churn <5%/year
- Reduce churn first Each 1% reduction = significant margin improvement
- Product-led growth Lower CAC = faster path to profitability
- Pricing strategy Annual contracts vs monthly
- NRR > 100% Expansion revenue = highly efficient growth
Profit leverage — price increase of 1% Often doubles net profit
A 1% price increase on £1,000,000 revenue = £10,000 more revenue. If fixed costs are unchanged, this £10,000 flows directly to profit. If current net profit is £50,000, this is a 20% improvement in profit from a 1% price rise.
| Revenue | £1,000,000 |
|---|---|
| 1% price increase | £10,000 extra revenue |
| COGS unchanged? | Yes — variable cost unaffected |
| Fixed costs unchanged? | Yes — direct to profit |
| Net profit before | £50,000 |
| Net profit after | £60,000 (+20%) |
- How to achieve price increase? Value communication, annual review
- Customer churn risk? Calculate break-even churn rate
- CPI pass-through Announce CPI increase clearly
- Differentiation required Commodity businesses can't easily raise prices
- Tiered pricing? Capture more from high-value customers
Profit leverage — COGS reduction of 2% Flows directly to gross profit
A 2% reduction in COGS on £1,000,000 revenue = £10,000–£20,000 saved (depending on COGS%). This flows entirely to gross profit — improving both gross and net margin simultaneously.
| Revenue | £1,000,000 |
|---|---|
| COGS (50%) | £500,000 |
| 2% COGS reduction | £10,000 savings |
| Gross profit improvement | £10,000 direct |
| Net profit before | £50,000 |
| Net profit after | £60,000 (+20%) |
- How to reduce COGS? Supplier negotiation, volume, alternative suppliers
- Just-in-time inventory Reduce waste and holding costs
- Private label substitution Higher margin products
- Process efficiency Labour productivity improvement
- Trade-off: quality risk Don't sacrifice quality for COGS savings
Profit leverage — 10% revenue increase Covers fixed costs first, then flows to profit
A 10% revenue increase on £1,000,000 = £100,000 extra revenue. After covering variable costs (50% of revenue = £50,000), the remaining £50,000 contributes to profit — potentially doubling net profit if it was £50,000.
| Revenue increase | 10% = £100,000 more revenue |
|---|---|
| Variable cost (50%) | £50,000 additional COGS |
| Contribution margin (50%) | £50,000 flows to profit |
| Net profit before | £50,000 |
| Net profit after | £100,000 (+100%) |
| Fixed cost leverage | Fixed costs don't grow with volume |
- Sales and marketing investment? How much to achieve 10% volume?
- CAC payback period Calculate investment vs return
- Capacity? Can operations handle 10% more?
- Existing customer expansion Lower cost than new customer acquisition
- Pricing trade-off Some volume strategies reduce margin
Profit leverage — reduce fixed costs 5% Flows directly to net profit
A 5% reduction in fixed overhead on £200,000/year overhead = £10,000 saved. Every pound of fixed cost reduction flows directly to net profit — unlike variable cost reduction which only saves per unit sold.
| Fixed overhead | £200,000/year |
|---|---|
| 5% reduction | £10,000 saved |
| 100% flows to net profit | Unlike variable costs |
| Net profit before | £50,000 |
| Net profit after | £60,000 (+20%) |
| Common fixed cost targets | Rent, software, admin staff |
- Renegotiate rent Especially post-COVID for many sectors
- Software audit Cancel unused tools
- Remote work savings Reduce office footprint
- Staff restructure? Sensitive but sometimes necessary
- Automation? Replace fixed labour with software
Café gross margin — 60–70% Before rent, staff, and overheads
Cafés achieve gross margins of 60–70% on food and beverage revenue. The primary costs of goods are coffee beans, milk, food ingredients, and packaging. Net margins are 3–8% after all overheads.
| Gross margin range | 60–70% |
|---|---|
| COGS components | Coffee, food, packaging |
| Net margin after overheads | 3–8% |
| Coffee gross margin? | ~80% on a £5 flat white |
| Food gross margin? | ~55–65% on food items |
| Key cost driver | Labour (30–35% of revenue) |
- Improve: push coffee sales Highest margin item in café
- Improve: reduce waste Spoilage directly hits COGS
- Reduce labour hours Roster carefully to peak times
- Menu engineering Feature high-margin items prominently
- COGS monthly review Supplier prices change frequently
Worked examples
| Inputs | Gross margin | Note |
|---|---|---|
| Revenue 100,000 with 65,000 cost of goods | 35% | 35% margin, 53.8% markup |
| With 20,000 of operating expenses | 35% | net margin 15%, 11,250 after tax |
| A 40% markup is a 28.6% margin | 28.6% | the same dollars, two denominators |
FAQFrequently asked questions
What is gross margin?
Gross margin = (Revenue − Cost of Goods Sold) ÷ Revenue × 100. It measures profitability after direct production or service delivery costs, before overhead expenses like rent, salaries, and marketing. A 60% gross margin means you keep 60p of every £1 of revenue after direct costs.
What is the difference between gross margin and net margin?
Gross margin only deducts the cost of goods sold. Net margin deducts all expenses including overheads, interest, depreciation, and tax. A business might have a 60% gross margin but only 8% net margin after all overheads are paid.
What profit margin should a small business target?
Varies by industry. Service businesses (consulting, agencies) typically target 20–40% net margin. Retail and hospitality often achieve 5–12% net. Product-based e-commerce typically achieves 10–20% net. The key benchmark is whether your margin exceeds your cost of capital and provides adequate return for the risk of running a business.
How do I calculate break-even from margin?
Break-even revenue = Fixed costs ÷ Gross margin ratio. If your fixed costs are £20,000/month and gross margin is 40%, break-even = £20,000 ÷ 0.4 = £50,000/month in revenue. Use the Break-Even Calculator for detailed unit-level analysis.
Does VAT affect my profit margin calculation?
No — profit margin is calculated on revenue and costs excluding VAT. VAT is collected on behalf of The HMRC and is not your revenue. Always use ex-VAT figures in margin calculations. The VAT Calculator can separate VAT from VAT-inclusive prices. Sources
The sources behind this calculator
- Corporate Finance Institute — EBITDA — why EBITDA is a non-GAAP measure with no single definition
- US SEC — Non-GAAP Financial Measures, Compliance & Disclosure Interpretations — the disclosure rules that exist precisely because EBITDA is not standardised
- Financial Reporting Council — the UK accounting and audit regulator
Last checked: September 2026. These are standard management-accounting definitions; where a term has no single agreed definition, the page says so.