Net Profit Margin Calculator

The net profit margin indicates how much money is actually left over per dollar of revenue after all costs have been deducted. It's the bottom line profit percentage once material costs, salaries, rent, interest and taxes are each subtracted.

If you enter two of the three values (net profit, total sales or profit margin), this tool will calculate the third value. If you know your profit and sales, you can find your profit margin. If you know your target profit margin and sales, you can determine your net profit. If you have a desired profit margin and net profit in mind, you can calculate what sales amount is required to achieve that profit.

Net profit margin formula:

Net profit margin is calculated by dividing net income by sales and expressing the result as a percentage.

The two remaining unknowns can be found by rearranging these same relationships.

To make it more understandable, an example would be if the sales are at $1 million and the net profit is $100,000 then the net profit margin will be 10 percent. In other words for every $100 of sales there is a $10 profit and $90 goes to costs.

Here's how to use this calculator:

1. Enter net profit and total sales for the same period of time and select the appropriate magnitude (thousands, millions, billions).

2. Check the profit margin. To calculate backwards, either enter your target profit margin or the profit or sales and the calculator will fill in the missing data.

3. Activate "Compare Gross Margin and Operating Margin" to show three different profit margins at the same time after you have entered your manufacturing costs and operating expenses.

4. Turn on Compare to industry to compare results with typical data for your industry.

Net profit margin, operating profit margin, gross profit margin:

The net profit margin is the most comprehensive measure of profitability because it deducts all costs. The other two profit margins above the income statement take into account fewer deductible expenses.

• The gross profit margin only takes into account the cost of goods sold (COGS), which is the direct costs attributable to the production of the products being sold. It does not take into account rent, salaries, marketing, interest or taxes.

• The return on sales reflects the profitability of core business, calculated from revenue minus direct costs and operating expenses before interest and taxes.

• In addition to all the mentioned costs, net return also takes into account interest and taxes, thus showing the share of profit that ultimately accrues to the owners.

If overheads are out of control a company can have high gross margins and low net returns. Comparing all three yields will pinpoint where the losses lie within the cost phase.

The profit margin is not the markup.

Although these two concepts are often confused, they represent different values. The profit margin represents the percentage of sales that is profit, while the markup represents the percentage of cost that is profit.

If a product's selling price is 100 and the cost is 75, then the profit is 25. The profit margin is 25 percent, calculated as 25 divided by 100. The markup is about 33 percent, calculated as 25 divided by 75. These two different percentages are based on the same sales figure. This calculator shows both at once so you don't have to confuse your pricing goals with profitability results.

What is a good profit margin?

This depends almost entirely on the industry. On average, across industries, a net profit margin of between 5 and 10 percent is common. In most fields, anything over 10 percent is good, over 20 percent is excellent, and under 5 percent is very tight.

However, the circumstances are of great importance. In a supermarket chain that relies on economies of scale, a profit margin of 3 percent is completely normal. For a software company, however, which should actually achieve a profit margin of more than 20 percent, this would be a warning signal. Always compare with similar companies in the same industry and do not just compare with an absolute number.

• We assess financial health. If profit margins are falling quarter on quarter then this is often an early sign that the rate of cost increases is outstripping revenue growth.

• We compare with competitors. The profit margins of the competition show how much room there is to lower prices while still keeping the business going.

• We provide information for lenders. Bankers usually look at the net profit margin over a three to five year period to assess loan size and repayment ability.

When revenue increases but profit margins decrease:

An increase in revenue does not always mean that a company is healthy. Suppose the revenues of a company doubles from $1 million to $2 million while net profit stays at $100,000. The profit margin will decrease from 10 percent to 5 percent.

The company must be doing more to generate the same revenue. Perhaps new departments have been set up or market share has been gained. It is also possible that cost increases are outpacing sales growth. The profit margin is a starting point for this discussion, and it is the reasons behind these changes that matter.

How to improve profit margins:

There is rarely a single solution; usually many small adjustments are combined to squeeze more profit out of each sale.

• Reduce operating costs without reducing production volume. Automate repetitive tasks in billing, disable unused software and vacate office spaces that are no longer fully occupied.

• Cut material costs. Renegotiate supplier contracts when they're up for renewal, order larger quantities to get volume discounts and switch materials if possible without compromising quality.

• Raise the price within a market acceptable range and observe the effect on sales. If sales barely change, then a five percent increase in price can significantly boost profit margins.

• Shift the product mix to higher-margin products. A slightly reduced overall sales is acceptable. Businesses that make high profits even when small are usually healthier.

• Check these values quarterly. Bad trends caught early can often be corrected with simple adjustments while late detection may require a restructure.