Face the facts. The Net Profit Margin Ratio affects you. And, it's not just boring math.
It's the percentage of profit from your business operations after you deduct your company's expenses, fees for interest, tax payments and some types of stock dividends if you're a corporation.
While it may not be a good indicator for comparing your company to other businesses in different industries, the net profit margin ratio tells you how the company measures up against similar businesses, in the same industry, with the same size, or to companies selling similar products and services and to those companies doing business in the same city or region.
Your efforts as a business owner to reduce expenses - or not, affect the numerator (net income) in the net profit margin ratio. Your efforts to revenues affect the denominator (net sales). Both of these actions on your part increase the net profit ratio. The simple way to get your percentage of profit takes 3 steps: 1- Figure out your net income (that is what's left after you deduct all of your expenses and from gross sales). 2- Figure out your net sales (it's easy because you just subtract returns and allowances from your sales income). 3- Use the net profit margin formula, ( Net Profit Margin Ratio = Net Income/Net Sales = ___ ),
Calculating the net profit margin and comparing it over time reveals areas where sales have decreased and where costs are trending higher. Don't feel like crunching the numbers? We love to - and we prepare easy to follow financial reports and calculate those ratios to help you make decisions and see your company grow.