Net Margin
Definition
Net margin is the percentage of revenue that remains as profit after all operating expenses, taxes, and interest are paid.
What Net Margin Means for Your Business
What it means
Net margin is the bottom line. It is what is left after gross margin pays for rent, insurance, office staff, marketing, trucks, software, and taxes.
Why it matters
Net margin is the ultimate measure of a business's health. Top residential service shops run 12% to 20% net. Below 8%, you are one bad month from trouble. Above 20%, you are unusually well run.
How contractors use it
Owners review net margin monthly against budget and prior year. They use it to benchmark the business against industry peers and to decide whether to reinvest or take distributions.
Real-World Example
An HVAC company went from 6% net margin to 14% over 18 months by raising prices, cutting a non-performing marketing channel, and renegotiating supplier pricing. On $3.8 million revenue, that shift was worth $304,000.
Related Terms
Gross Margin
Gross margin is revenue minus the direct cost of labor and materials, expressed as a percentage of revenue.
Overhead Allocation
Overhead allocation is the accounting method of spreading indirect costs like rent, insurance, and office salaries across jobs or departments so true profitability can be measured.
Cost of Goods Sold
Cost of goods sold, or COGS, is the direct cost of labor and materials required to deliver the services you billed, excluding overhead.
Job Costing
Job costing is the practice of tracking every labor, material, and overhead cost tied to a specific job so you can measure its true profitability.
Effective Hourly Rate
Effective hourly rate is total billed revenue divided by total paid hours, revealing what each tech is actually earning the business per clock hour.
Put This Into Practice with Free Software
Kaldr Tech handles net margin and everything else you need to run your shop. $0/month, 3.5% + 30¢ per transaction.