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:
——— (Divided by) —- x 100
Or in figures:
———- (Divided by) —– X 100
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.
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.