Image Alt Text
accounting

What Is Net Profit Margin?

Net profit margin (NPM) is the ratio of net profits to sales or revenue for a business or business segment. You measure net profit margin as a percentage, and it shows how much of each dollar in revenues becomes profit. Generally, the higher your NPM, the better for your business. But depending on the industry, a low profit margin can still mean big profits in terms of sheer number of dollars.

How to Calculate NPM

Here’s the formula for calculating your NPM:

  • Net profit margin = net profit / total revenue

Imagine your business sells three products, which generate $100,000, $50,000, and $80,000 in sales. Your company’s net profit is $50,000, so you plug those numbers into the formula.

  • $50,000 / ($100,000 + $50,000 + $80,000) = 0.217 or 21.7%

Your NPM is 21.7%, meaning that 21.7 cents of every dollar you make is profit.

Why Your Small Business Profit Margin Matters

Calculating and tracking your NPM and your income regularly ensures you stay aware of how well your business is doing. When you’re familiar with those numbers you’re able to analyze them and make adjustments to increase them. Are your material costs going up and eating away at your net profit margin? That might mean raising prices, boosting sales, renegotiating with your existing suppliers, or finding completely new ones. Perhaps reducing expenses in another area is an option, such as finding a less expensive shipping method or increasing automation. Your accountant or an industry consultant might provide valuable insight. There’s always something you can do to improve your business’s bottom line when you’re armed with the right information.

You’re working hard to make your business a success. Couldn’t you use more help? 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.


Related Articles

Your privacy

We collect data when you use our website to improve its performance. Doing so also helps us provide a secure, personalized experience. Select 'Accept cookies' to agree or 'Cookies settings' to choose which cookies we use. You can change your preferences anytime by clicking the 'Manage cookies' link in the footer.

Choose your cookie preferences

Some cookies are needed to make our website work and can't be turned off. But we need your consent to use others that are not essential. You can make your choices below and update them at any time using the 'Manage Cookies' link. To find out more, visit our Cookies Policy.

These cookies are necessary for the site to function. They also help us keep your data safe.
These cookies allow us to enhance your experience and remember your preferences, region or country, language, and accessibility options.
These cookies tell us how customers use our website. We study and organize this data to help us optimise our content and provide you with personalised experiences.
These cookies help us provide you with relevant communications and ads in our products and on other sites.

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Firm of the Future

Expert advice and resources for today’s accounting professionals.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.