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.
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