Most New Zealand business owners can tell you their annual revenue without hesitating. Ask them their gross margin by product line, or their net margin after owner drawings are normalised, and the room goes quiet.

This is not unusual. It is, however, a problem — and not just for business owners thinking about selling. If you do not know your real margins, you cannot make good decisions about pricing, costs, hiring, or growth. And when the time comes to sell, thin or opaque margins will cost you significantly on the sale price.

This guide walks through what margins actually are, how to calculate them, and what to do if you do not like what you find.

What Is a Margin?

A margin is the percentage of revenue left over after you subtract a particular category of costs. There are two you need to understand:

Gross margin is what remains after you subtract the direct costs of producing your product or delivering your service — materials, subcontractors, direct labour. It tells you how efficiently you are converting revenue into profit before overhead.

Net margin is what remains after you subtract everything — direct costs, overhead, owner salary, interest, and tax. It is the truest measure of what the business is actually making.

Both matter. A business with a healthy gross margin but a thin net margin has an overhead problem. A business with a thin gross margin has a pricing or direct cost problem. They require different fixes.

How to Calculate Your Gross Margin

The formula is straightforward:

Gross Margin (%) = (Revenue − Cost of Goods Sold) ÷ Revenue × 100

Cost of Goods Sold (COGS) includes everything directly tied to delivering your product or service: raw materials, stock, subcontractor costs, and the direct labour of people doing the work (not management or admin).

If your business turns over $1.2 million and your COGS is $720,000, your gross margin is:

($1,200,000 − $720,000) ÷ $1,200,000 × 100 = 40%

Whether 40% is good depends entirely on your industry. A trades business might target 35–45%. A professional services firm might expect 55–70%. A retail business might run at 25–35%. Benchmarking against your sector matters.

How to Calculate Your Net Margin

Net Margin (%) = Net Profit ÷ Revenue × 100

Net profit is what is left after all costs — including your own salary at a market rate. This last point is critical for NZ owner-operated businesses: if you are paying yourself below market rate, your net margin looks better than it really is. A buyer will normalise this, and so should you.

If your net profit (after a market-rate owner salary) is $120,000 on $1.2 million revenue, your net margin is 10%. For most NZ SMEs, a net margin of 8–15% is reasonable. Below 5% is a warning sign.

Why Most NZ Business Owners Do Not Know Their Real Margins

There are a few common reasons:

Revenue is visible; costs are scattered. Revenue shows up clearly in your bank account. Costs arrive as dozens of separate transactions across suppliers, wages, software subscriptions, and vehicle expenses. Without a system that allocates costs properly, the picture stays blurry.

Job costing is not done consistently. Many trades and project-based businesses quote jobs and invoice jobs but never go back to calculate what each job actually cost. The profitable jobs and the loss-making jobs look the same on the surface.

The accountant produces annual accounts, not monthly margin reports. Annual accounts are a legal requirement. They are not a management tool. By the time you see last year's numbers, the decisions that shaped them are long past.

Owner drawings obscure the picture. In many NZ owner-operated businesses, the owner takes drawings rather than a salary, which makes the profit figure meaningless without adjustment.

Breaking Down Margins by Product or Service Line

Knowing your overall margin is a start. Knowing your margin by product line, service type, or customer segment is where the real insight lives.

Consider a plumbing business that does residential maintenance, commercial fit-outs, and emergency callouts. The overall gross margin might be 38%. But when broken down:

• Residential maintenance: 44% gross margin
• Commercial fit-outs: 29% gross margin
• Emergency callouts: 51% gross margin

The commercial fit-out work — which feels like the "big jobs" — is actually the least profitable. The owner has been chasing volume in the wrong area.

This kind of analysis changes decisions. It changes what you quote, what you promote, what you staff for, and ultimately what your business is worth.

What Thin Margins Mean for Your Business Value

When a buyer or their accountant assesses your business, margins are one of the first things they examine. A business with strong, consistent margins commands a higher EBITDA multiple than one with thin or volatile margins — even at the same revenue level.

Thin margins also raise questions: Is the pricing wrong? Are costs out of control? Is the business dependent on one high-volume, low-margin customer? These questions create uncertainty, and uncertainty reduces what buyers will pay.

Improving your margins before a sale is one of the highest-return activities you can undertake. A 3-percentage-point improvement in net margin on a $1.5 million revenue business adds $45,000 to annual profit — and at a 3× EBITDA multiple, that is $135,000 more on your sale price.

What to Do If Your Margins Are Thinner Than They Should Be

Start with diagnosis before action. Thin margins have different causes and different fixes:

If gross margin is thin: Look at your pricing, your direct costs, and your job costing. Are you pricing for the market or for the work? Are subcontractor rates eating into your margin? Are material costs being passed through accurately?

If net margin is thin despite healthy gross margin: Look at overhead. What fixed costs are you carrying that do not scale with revenue? Rent, software subscriptions, vehicles, admin headcount — these need to be reviewed against the revenue they support.

If margins vary wildly month to month: Look at revenue mix and timing. Inconsistent margins often reflect inconsistent job types or seasonal patterns that need to be managed actively.

The Connection to Succession Planning

A Business Profitability Review is one of the first things we do with clients preparing for exit. Not because it is a box-ticking exercise, but because it consistently reveals opportunities that directly increase the sale price — and because buyers and their advisors will find the same issues during due diligence anyway. Better to find them first.

If you have never done a structured margin analysis of your business, now is the right time — whether you are planning to sell in two years or ten.

For a deeper look at where margin leaks occur, see our article on margin leakage in NZ businesses. And if you want to act on what you find, our profit improvement service is designed to help you do exactly that.

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Ridgeline Advisory is a Christchurch-based business advisory firm helping NZ business owners improve profit, reduce costs and plan succession and exit.

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