What is net profit margin and how is it different from cash flow?

Net profit margin = (Net Income ÷ Revenue) × 100. A business with $1,000,000 in revenue and $80,000 in net income has an 8% net profit margin. Average margins vary widely by industry: professional services typically sees 15–25%; retail, 2–6%; construction, 3–8%. A 'good' margin depends entirely on the sector and the capital intensity of the business.

The key distinction for small business owners is that net profit margin is an accounting measure, not a cash measure. A profitable business can still fail if its cash flow is negative — for example, if clients pay slowly, if inventory is overstocked, or if loan repayments drain the operating account. This is the core concept behind the cash flow vs. profit distinction that surprises many first-time business owners.

For invoice collection, the margin gives context to collection decisions. A business with a 5% net margin on a $2,000 invoice has earned $100 of profit on that job. If collection costs $150 in time and fees, the project is underwater. Higher-margin businesses have more room to absorb collection costs; lower-margin businesses must be more disciplined about collection efficiency.