What is a Healthy Profit Margin?
- John Gates
- Dec 3, 2024
- 3 min read
Updated: Aug 16
Running a small business in the UK isn’t easy. You work hard, sales are coming in, but at the end of the month you may ask yourself: “Why isn’t there much money left?”
This is where your profit margin comes in. It’s not enough to just bring in revenue. What really matters is how much profit you keep. In this blog, we’ll explain what a healthy profit margin looks like for UK small businesses, why it’s important, and what you can do if yours is too low.
What Are Profit Margins?
Profit margin is the percentage of your sales that turns into profit after covering costs.
Gross Profit Margin are profit after direct costs (like materials, stock, or staff wages).
Gross Profit Margin = (Sales – Direct Costs) ÷ Sales × 100
Net Profit Margin are profit after all costs (overheads, tax, utilities, rent, etc).
Net Profit Margin = (Net Profit ÷ Sales) × 100
But here’s the key: profit margin isn’t just an accounting formula — it’s a business health check. It tells you how efficiently you’re running, whether your pricing is right, and if your costs are under control.
Gross vs. Net Profit Margins
Aspect | Gross Profit Margin | Net Profit Margin |
Focus | Revenue minus COGS | Revenue minus all expenses |
Shows | Production and sales efficiency | Overall profitability |
Insight | Cost control in manufacturing or purchasing | Financial health after all obligations |
Common Issues | High production costs, pricing problems | Overspending, poor cost management |
What Is a Healthy Profit Margin for Small Businesses in the UK?
There’s no single answer because it depends on your industry. But as a guide:
Retail: 2–5% net profit margin is common.
Hospitality (cafés, restaurants): 3–7% is typical.
Professional services (consultants, accountants, marketing): 15–30%.
Construction & trades: 5–10%.
For most small businesses in the UK, a healthy net profit margin is at least 10%. That means for every £1 you earn, 10p stays as profit after costs.
If your margin is much lower, it’s a sign you may need to review pricing, costs, or efficiency.
Why Profit Margins Important for Small Business Owners?
Profit margins are vital tools for small business owners as they:
Measure Financial Health: Margins help determine whether your business is sustainable or if adjustments are needed.
Evaluate Pricing Strategies: Understanding your gross profit margin can reveal whether you’re charging enough for your products or services.
Control Costs: Identifying a low gross or net profit margin can highlight areas where costs are eating into your profits.
Set Benchmarks: Monitoring your profit margins over time can help you assess whether your business is improving and meets industry standards.
Support Decision-Making: Accurate profit margin analysis can guide critical decisions, such as expanding operations, investing in new products, or cutting expenses.
Attract Investors: Investors and lenders often evaluate profit margins to gauge a company's profitability and risk level. A healthy margin increases your credibility.
Many small business owners focus on turnover (sales) but still struggle with cash flow. These struggles all come back to understanding and managing your profit margin.
How to Improve Profit Margins
If your profit margins are lower than expected, consider these strategies:
Review Your Pricing. Don’t undercharge. Check what competitors in your area are charging. Even a small increase (2–3%) can protect your margin.
Cut Hidden Costs. Review supplier contracts, subscriptions, and overheads.
Check Your VAT Scheme. The right VAT scheme (Flat Rate, Standard, or Cash Accounting) can improve your cash flow.
Focus on High-Margin Services. Not everything you sell makes the same money. Promote the most profitable products.
Track Monthly, Not Yearly. Use Xero, QuickBooks, or similar tools to review margins regularly, so you can make changes quickly.
Example: The Café in Manchester
A café owner was struggling because milk, energy, and staff costs kept rising. Their net margin had fallen below 3%. After increasing coffee prices by 20p and renegotiating supplier contracts, they lifted their margin to 7%. Small changes made a big difference to long-term profit.
Final Thoughts
A healthy profit margin is different for every business, but knowing your numbers helps you spot problems before they get serious.
If you’re unsure whether your margins are healthy — or if you’re working hard but still not seeing results — now is the time to review your finances.
At Duo Accountants, we help UK small businesses find hidden profit leaks, set the right prices, and build stronger profit margins. Book a free consultation today and let’s make sure your business is working for you.
