Cash is king! But profit generates excess cash. But what is Net Profit Margin? Understanding your underlying profitability is critical to a healthy and sustainable small business. But so many more insights into underlying profitability and costs can be gleaned than in your profit and loss statement. Here we look at some underlying measures – measures that are often relative type measures.
Net Profit Margin
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.
What does it mean?
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
How we derive NPM?
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%
How Can I Improve My Net Profit Margins?
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:
- Sales revenues.
- Cost of goods (direct costs)
- Overheads or expenses
- Depreciation and amortisation Policies
- Other non operating income or expenses