Your profit does not necessarily indicate the positive levels of cash generated by your business. It is, however, a reliable time-based measure for gaining an understanding into the overall value that the business is providing. It is also useful to compare the efficiency of different businesses. For instance, a business generating a net margin of 10% is wholly more efficient at generating excess profits (and maybe ultimately cash) relative to its costs than a business generating 5% margins.
Please note. Net profits or margins do not equal cash within the business. The timing of cash into and out of the business will also play a part in understanding the levels of cash and therefore liquidity or solvency It does not however, assess the timing of that cash into the business. Check your net profit margin now with Jazoodle
Total Net Profit (amount) Divided by:
Total Sales (amount)
eg: Sales $100,000, Net Profit $16,000
NPM equals 16,000 / 100,000 [times100] = 16%
If your margins are lower than you would like, or even negative, there are a number of things you can assess to help improve them. As always, please work with your accountant or business advisor for individual advice for your business. Net Profit Margins are affected by the following: