Formula for calculating net profit margin

Posted by admin on 7 May, 2009 under Business advice, Business cash flow and planning, Business development, What you measure you can manage | 5 Comments to Read

The net profit in a business tells an investor or business owner how much money the company makes for every £1 it generates in sales revenue – the higher the profit the better the business.

The net profit margin is calculated by dividing total net profit by total sales revenue, for example:

XYZ Company Profit and Loss Statement for the period ended 30 April 2009
	£	£
Total sales		340,000
Cost of sales
Opening stock	11,000
Purchases	120,000
Closing stock	(13,500)
	________
Cost of sales		117,500
		________
Gross profit		222,500
Overheads*		150,000
		________
Net profit		72,500
		======
Net profit margin		21.3%

In the above example XYZ Company has a total net profit of £72,500 and total sales revenue of £340,000 and using the formula for calculating net profit margin, this gives a net profit margin of 21.3%, calculated as follows:

Net profit
——— (Divided by) —- x 100
Sales revenue

Or in figures:

£72,500
———- (Divided by) —– X 100
£340,000

The above formula gives the net profit margin for XYZ Company as 21.3%

Net profit margins for businesses vary by industry and depending on how a business is run within each industry will produce differing net profit margins. The more efficient the business then the more likely the net profit will be higher in comparison to the sales revenue it generates.

There are a number of ways in which to improve profit margins in a business one of which is to use “Profit Increase Software“, which looks at the ways to grow a business and improve profits.

Of course there are two benefits from having higher profits, which are increased money in the pockets of the business owners and a more valuable business, should you decide to sell.