Business Net Profit Margin
What it is, how it’s calculated and why it’s important to small business owners.
Calculation
Net Profit Margin = (Net Profit ÷ Total Revenue) x 100
Net Profit = Total Revenue – Total Expenses
Definition
Net Profit Margin is the percentage of Total Revenue that translates into a profit for a company. It can be calculated by dividing a company’s Net Profit by their Total Revenue and then multiplying that number by 100 to convert it into a percentage.
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How it is Used
The Net Profit Margin shows how effective a company is at turning revenue into profit and is one of the most important indicators of their financial health. It is a key benchmarking metric for businesses since net profit margins can be easily compared to competing business regardless of their size.
Ways to Improve Net Profit Margin:
A business can improve their Net Profit Margin by either increasing their Total Revenue or by decreasing their Total Expenses. Companies can increase their overall revenue through slightly raising the price of or diversifying their current products or services. Companies can decrease their overall expenses by improving energy efficiency or by finding cheaper sources for raw materials needed to manufacture goods.
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