Yes, we know money isn't everything. But, as founder of a start-up company, you don’t keep your doors open by daydreaming. It's all well and good to tell vendors, investors and loan officers that you want to make a difference in the world. But you also need to share with them some financial metrics – specifically, how much money you’re making, aka your profit margin.

About now, you're probably thinking, "How much should my profit margins be?" If your business is new, there are several factors to consider before developing a sense of what that magic percentage is, and what to aim for.

Net vs. Gross

First, you have to understand the two types of profit margin. Small business owners use gross profit margin to measure the profitability of a single product. If you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). Gross profit margin is a good figure to know, but probably one to ignore when evaluating your business as a whole.

Net profit margin is your metric of choice for the profitability of the firm, because it looks at total sales, subtracts all of your business expenses and divides that figure by total revenue. If your new business brought in $300,000 last year and had expenses of $250,000, your net profit margin is 16%.

Consider the Industry

Let’s say that you own a bakery. You make some of the best wedding cakes (who are we kidding, THE best) in town. You kept really good records and, after doing the math, came up with a net profit margin of 21%.Your friend owns an IT company that installs complicated computer networks for businesses and has a net profit margin of 16%.

Can you secretly feel like a better business owner because you have an extra five percentage points on him? Unfortunately, it doesn’t work that way.

Profit margin is industry-specific. Because of the economic factors of each industry, business owners make more margin in some sectors compared to others. For example, if you were an accountant you could expect margins of 19.8%. If you’re in the food service business, you might only see net margins of 3.8%. Does that mean you should sell your bakery and become an accountant? No. Profit margin doesn’t measure how much money you will make or could make, only how much is actually made on each dollar of sales.

If you’re a consultant, your margins are likely quite high since you have very little overhead. You can’t compare yourself to a manufacturer that rents space and equipment, and must invest in raw materials.

New vs. Mature

You should expect to have a lower profit margin in the beginning, right? Of course, it depends on your field – but, in most, that’s surprisingly not the case. In the service and manufacturing industries, profit margins decrease as sales increase. The reason for that is simple. Businesses in these sectors may see a 40% margin until they hit around $300,000 in annual sales. That’s about the time where the business has to start hiring more people.

Each employee in a small business drives the margins lower. One study found that 90% of all service and manufacturing businesses with more than $700,000 in gross sales are operating at under-10% margins, when 15% to 20% are likely ideal.

The Bottom Line

In the beginning, when your company is small and simple, your margins will likely be quite impressive. You don’t have a large workforce and other substantial overhead expenses. As your sales increase and your business grows, more money comes in, but your margins will likely shrink because you’re probably hiring more people, investing in bigger facilities and expanding your product line. Simply bringing in more cash doesn’t mean you’re making a bigger profit.

Numerous sources can provide data on the size of profit margins in your industry (for ideas, see What's A Good Profit Margin for a Mature Business?). If these sources give you an average net margin, expect yours to be higher than that, if your firm is only a few years old.

And as you grow, don’t take your eyes off the margins. Larger sales figures are great for the ego, but if you aren’t making money on those sales, they won't get you very far.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.