While several different ways to measure a company’s profitability exist, properly measuring net income arises from calculating the net profit margin.
What is Net Profit Margin?
The net profit margin measures how much net income-or profit-is produced as a percentage of revenue. It is the financial ratio to reveal and determine how much profit a company or business can extract from its total sales. For example, a company with a 30% net profit margin indicates that it will keep 30 cents from each dollar made in sales revenue. Usually expressed as a percentage, net profit margin can also be shown in decimal form.
You may be asking, “well what is a good profit margin for my business?” A favorable margin considerably varies by industry, but typically, a 5 % margin is considered low, 10% net profit margin is considered average, and a 20% margin is considered high. For example, an ideal profit margin for restaurants resides between 6-9%, whereas other industries may hover around 40%. Again, it’s important to keep in mind that these guidelines vary by sector and company size, as well as additional factors.
What is the Formula for calculating net profit margin?
Before calculating net profit margin, both net profit and net sales must be determined. To calculate net profit, subtract all expenses from total revenues. Net sales can be determined by subtracting allowances, returns, and discounts from total revenue.
To calculate net profit margin, divide net profits by net sales and multiply by 100 to turn into a percentage.
Net Profit Margin = Net Profit/Revenue
For example: To find the net profit margin for a company with a gross sales of $250,000, a sales return of $5,000, and net profit of $30,000, begin by subtracting sales return from gross sales. (250,000-5,000)=$245,000. Next divide net profit by net sales (30,000/245,000) x 100=12.25%. Here, the company’s net profit margin has been calculated at 12.25%.
Why is Net Profit Margin Important?
Serving as a leading determinant in your business growth and success, finding and recognizing your net profit margin demonstrates its’ overall profitability. Additionally, net profit margin is important in assessing decisions-such as lending-because it effectively shows the firm’s potential net worth based on earnings. Higher net profit margins indicate the likelihood of a business to endure possible periods of extreme losses.
Furthermore, this allows you to see whether outgoings are primarily coming from business activities or from expenses. With this information, your can start deciding to allow your business to keep more money from each sale it makes.
How to Improve Your Net Profit Margin
While your current net profit margin may not be up to standard, there are several actions you can take to work to increase it.
-Analyze your overhead costs and work to reduce them
-Increase our sales volumes so that fixed costs spread to a greater extent
-Ask your customers! Seek advice on how the company can completely optimize it’s current offering or potentially find a new market.
If you have exhausted countless efforts attempting to gain clarification on or improve your existing net profit margin, it’s time to stop going it alone. Our team of experts at MCDA CCG, INC., offer a various range of financial services to help you understand and gain traction in this area. Whether your business needs help with Accounting Services, Audit Preparation, or even if you’re just looking for extra insight regarding Net Profit Margin, please don’t hesitate to contact us. We believe in offering the highest level of quality to each of our clients to ensure your complete satisfaction and financial success. Contact us today!