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The net profit in a business tells an investor or business owner how much money the company makes for every £1 it generates in sales revenue – the higher the profit the better the business.

The net profit margin is calculated by dividing total net profit by total sales revenue, for example:

XYZ Company Profit and Loss Statement for the period ended 30 April 2009
 
£
£
Total sales  
340,000
Cost of sales    
Opening stock
11,000
 
Purchases
120,000
 
Closing stock
(13,500)
 
 
________
 
Cost of sales  
117,500
   
________
Gross profit  
222,500
Overheads*  
150,000
   
________
Net profit  
72,500
   
======
Net profit margin  
21.3%

In the above example XYZ Company has a total net profit of £72,500 and total sales revenue of £340,000 and using the formula for calculating net profit margin, this gives a net profit margin of 21.3%, calculated as follows:

Net profit
——— (Divided by) —- x 100
Sales revenue

Or in figures:

£72,500
———- (Divided by) —– X 100
£340,000

The above formula gives the net profit margin for XYZ Company as 21.3%

Net profit margins for businesses vary by industry and depending on how a business is run within each industry will produce differing net profit margins. The more efficient the business then the more likely the net profit will be higher in comparison to the sales revenue it generates.

There are a number of ways in which to improve profit margins in a business one of which is to use “Profit Increase Software“, which looks at the ways to grow a business and improve profits.

Of course there are two benefits from having higher profits, which are increased money in the pockets of the business owners and a more valuable business, should you decide to sell.

Formula for calculating net profit margin
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8 thoughts on “Formula for calculating net profit margin

  • 10 July, 2010 at 11:31 pm
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    thanks a lot

    I hope I could be a perfect bussiness man learning from u!thanks again

  • 10 May, 2011 at 10:27 pm
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    thanks now i know how to invest in a more profitable business

  • 28 May, 2011 at 1:36 am
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    Hi Ash – the above figures are all net of VAT – business income, costs and profits in a profit and loss are always show net of VAT. VAT affects your cash flow, so for example your sales will be inclusive of VAT (if you are a vatable business), which is what will be paid into your bank, but when you include the amount on your profit and loss, you need to deduct the VAT.

  • 15 February, 2012 at 3:35 pm
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    if this is the formula then please explain what is this?
    net profit=operating profit-non operating expense+non operating income.?

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