Understanding whether your margins are healthy requires benchmarking against your industry. Australian small business profit margins vary significantly by sector: trades and construction typically run 10-20% net profit, retail 2-6%, professional services 20-40%, hospitality 3-10%, and health/beauty 15-25%.
Gross profit margin is your revenue minus direct costs (materials, subcontractors, direct labour) divided by revenue. This tells you how much you keep from each dollar of sales before overheads. Net profit margin subtracts all operating expenses (rent, insurance, admin, marketing, depreciation, interest) from gross profit.
If your gross margin is below industry benchmarks, the problem is pricing or direct costs — you're either charging too little or your materials and labour costs are too high. If gross margin is healthy but net margin is thin, the issue is overhead: you're spending too much on fixed costs relative to your revenue.
Track margins monthly, not just at tax time. A gradual margin decline is easy to miss in a busy business but compounds quickly. A 2% net margin drop on $500K revenue is $10,000 per year — enough to be the difference between a comfortable year and a stressful one.