Quick Answer: Calculate profit margin by dividing your profit by revenue and multiplying by 100 to get a percentage. According to the SEC financial guide, the basic formula is (Revenue - Costs) / Revenue × 100. For small business owners managing hourly teams in restaurants, salons, or retail stores, tracking margins helps you understand how much you actually keep from every dollar earned after covering labor and other costs.
What's the Basic Formula for Calculating Profit Margin?
Whether you're running a coffee shop, managing a salon, or operating a retail store, the math works the same way—and it's simpler than you might think.
Profit Margin = (Revenue − Costs) / Revenue × 100
To calculate your net profit margin, follow these steps:
- Start with your total revenue from sales.
- Subtract all your costs, including ingredients, supplies, direct labor, administrative salaries, rent, utilities, and other operating expenses.
- Divide that profit number by your revenue.
- Multiply by 100 to convert to a percentage.
Important note for businesses with hourly teams: This calculation produces your net profit margin, which includes all labor costs. If you want to measure only revenue remaining after direct service costs (gross profit margin), exclude administrative salaries, rent, utilities, and other overhead expenses from your calculation.
Here's a real example: Your coffee shop brings in $5,000 in weekly sales. Your costs—including beans, cups, and wages for baristas and servers—total $3,000. Your profit is $2,000. Divide $2,000 by $5,000 to get 0.40. Multiply by 100 to get 40% profit margin.
That means for every dollar your customers spend, you keep 40 cents as profit. When labor costs rise or supplies get more expensive, that percentage shrinks. Tracking it weekly helps you spot problems before they hurt your business.
How Do Different Types of Profit Margins Work?
Not all profit margins measure the same thing. Each type tells you something different about your business.
- Gross profit margin measures what's left after subtracting direct costs like food ingredients, salon supplies, or stylist commissions from your total sales. If your restaurant has $10,000 in sales and $3,500 in food costs, your gross profit margin is 65%. This shows whether your pricing strategy covers direct costs before accounting for rent, utilities, and indirect labor.
- Operating profit margin goes further by subtracting operating expenses like rent, utilities, and your entire payroll. This reveals whether your day-to-day operations are sustainable.
- Net profit margin is your true bottom line after everything, including taxes and interest. According to the SEC financial guide, net profit margin represents the percentage of revenue remaining as profit after deducting all costs and expenses. A restaurant might show 65% gross margin but only 3-5% net margin after all expenses.
What's a Good Profit Margin for Small Businesses?
A "good" profit margin depends entirely on your industry. Comparing your restaurant to a consulting firm makes no sense because the business models are fundamentally different.
Industry benchmarks show wide variation. According to National Restaurant Association data, restaurants typically operate at 3–9% net profit margins. Salon margins average 8% net, though well-run operations achieve 10–15%. Retail margins vary widely depending on the category.
Labor costs directly impact these numbers. According to SBA guidance, employee costs run 1.25 to 1.4 times base wages when you factor in payroll taxes and benefits. For restaurants where labor represents 25-35% of revenue, a 2% labor cost increase can eliminate nearly half your net profit.
Controlling labor costs through accurate scheduling and time tracking becomes your most powerful lever for protecting margins.
How Does Homebase Help with Profit Margin Management?
Tracking labor costs manually while running a busy shift means numbers slip through the cracks. A time tracking and payroll system helps you monitor one of your biggest controllable expenses in real time.
With the time clock and digital timesheets, you capture accurate hours without buddy punching or timesheet errors. The scheduling tool shows running labor costs as you build each week's schedule. And payroll processes everything automatically, so you stop staying late on Fridays.
Get Homebase free for six months.
Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced the SEC's Beginners' Guide to Financial Statements for profit margin definitions, SBA guidance for employee cost calculations, Department of Labor labor cost documentation, National Restaurant Association data on industry profit margin benchmarks, Professional Beauty Association for salon industry statistics, and Bureau of Labor Statistics data on retail margins.