Net Profit Margin

Sorting out the profit wheat from wasted profits chaff

Net Profit Margin is the percentage of profit from each dollar of sales. Net Profit is what's left after all expenses have been deducted. It's the famous or infamous - depending upon your view - bottom line. the real value that enters into the balance sheet as retained profit, and is a major contributing factor to the strength of a company and it's ability to keep investing for survival and growth

Given two companies with identical balance sheets, and sales, the company with the higher margin (profit percentage) is performing better. Of course, there is no such thing as two identical companies, but you knew that already..

Net Profit Margin = Net Profit / Sales

In the sample income statement above, if we apply the net margin formula:

$1,275 Net Profit / $97,500 Sales = 1.31%

Strategies for improving the margin involve developing plans that pay close attention to the activities which increase profit per dollar of sales.

Such tactics could include focussing on smart sales pricing strategies to reward loyal and more profitable customers, or skewing the product sales mix to sell more of the more profitable items in the product range.

Simultaneously, concentrating on reducing direct production costs, either through supplier negotiations, or more efficient production techniques, including limiting waste by increasing quality and reducing product storage costs by implemeting more effective just-in-time production techniques.

Paying close attention to the management of working capital can make a substantial difference to the return on invested capital, and manifest itself in greater net profits.

Constant scrutiny of overheads and a program working at overhead reductions will also come through to the bottom line in greater net profits, and better margins.

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