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What is Net Profit Margin

>> December 27, 2011

Net profit margin may be defined as net profit ratio. It tells us, the amount of net profit out of every $ 100 sales. It may be 10% or 20% or any. It is different from gross margin because in net profit margin, we take only net profit instead of gross profit. After calculating net profit margin, we compare it with gross margin for checking whether our all indirect expenses are under control or not.

Following is the formula of Net Profit Margin :

=  Net Profit / Sales or Revenue from Services X 100

For example, if sales is $ 1000 and cost of goods sold is $ 100  and other operating  expenses are $ 600. Calculate Net Profit margin.

=   Net Profit / Sales X 100

= Sales - Cost of goods sold - operating expenses / sales X 100

= 1000 - 100 - 600 / 1000 X 100 = 30%

Benefits of Calculating Net Profit Margin 

1. We calculate net profit margin for making future price policy. We can decrease this margin for reducing our product prices. With this, we can increase our sales.

2. After calculating our net profit margin, we can compare it with our competitors. With this, we can defeat our competitors in pricing war.

3. Net profit margin is also useful for study the performance of company. After calculating net profit margin with past accounting figures, we analyze whether it is OK for surviving our business or not.

4. Sometime net profit margin is used for marketing purpose also. If we sell 5 products who have different prices. We can change each product's price but keeping same overall net profit margin as per our marketing strategy.

Net Profit Margin Vs Markup

Net profit margin is not markup. Markup is just way to calculate selling price on the basis of product cost. In markup, we can include both gross profit, net profit and other indirect expenses. But in net profit margin, we use just net profit and net sales.

Related : Reason of Losses 

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