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# How To Calculate Net Profit Margin: Assessing the Financial Health of Your Small Business

Small businesses need to know how to calculate net profit margin to better understand their financial health. Net profit margin measures how much of a business’s sales is actual profit, after accounting for the cost of goods sold, operating costs and taxes. It tells you the ratio of net income to revenue and gives insights into the overall profitability of a company. Net profit margin differs from gross profit margin, which only measures revenues after the cost of goods sold, without factoring in any other costs. Net profit margin is calculated from a business’s income statement, which looks at the revenues, expenses and overall profit or loss generated by a business over a specific period of time. Generally speaking, companies with a higher profit margin are in a better financial position than businesses with lower profit margins. Small business owners should understand how to calculate net profit margin to evaluate whether their business practices are having a positive or negative impact on the company’s bottom line.

These topics offer easy solutions for how to calculate net profit margin:

How to Calculate Net Profit Margin

What’s the Importance of Net Profit Margin?

Best Net Profit Margin Calculator

What Is Considered a Healthy Operating Profit Margin?

What Is a Good Net Profit Margin for a Service Business?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

## How to Calculate Net Profit Margin

To calculate net profit margin, look at your business’s income sheet and note your revenue or total sales. Then, find your net income by subtracting these figures from your revenue:

• Cost of good sold
• Fixed costs
• Interest
• Tax
• Dividend payments (if your company pays stock dividends)

Finally, divide net income by revenue and multiply it by 100 to express it as a percentage. The final figure is your net profit margin.

Here’s the equation to follow when calculating net profit margin:

Net Profit Margin = (Total Revenue - Total Costs) / Revenue x 100

### Net Profit Margin Calculation Example

This sample net profit margin calculation can help you better understand how to run the formula for your own business. Many of these calculations will already be prepared on your business’s income statement, but going through all the steps helps you better understand what profit margin is and how it’s calculated.

Company XYZ sold 50,000 units of its product in 2018 at a cost of \$10 per unit. The cost of goods sold for the product was \$6 per unit. The company’s operating expenses for the year totalled \$25,000 and they paid \$30,000 in taxes.

Step 1: First, find the company’s total earnings, which is the number of units sold multiplied by the cost per unit.

• Revenue = 50,000 x 10
• Revenue = 500,000

Step 2: Next, net income is calculated by subtracting from the total revenue the cost of goods sold, the operating expenses (fixed costs) and taxes. The cost of goods sold in this case is \$6 x 50,000 units, or \$300,000.

• Net income = 500,000 - (300,000 COGS + 25,000 operating expenses + 30,000 taxes)
• Net income = 500,000 - 355,000
• Net income = 145,000

Step 3: Finally, to calculate net profit margin, divide net income by revenue and multiply by 100.

• 145,000 / 500,000 = .29 X 100
• Net profit margin = 29 percent

## What’s the Importance of Net Profit Margin?

If you ever seek out a loan for your small business, lenders will look at your net profit margin before determining whether to lend you money. A company with a healthy net profit margin is more attractive to lenders, because a strong profit means you probably have a healthy cash flow and are therefore less likely to default on your debt.

## Best Net Profit Margin Calculator

There are a number of easy-to-use net profit margin calculators available online if you don’t want to do the calculations yourself. One of the best net profit margin calculators available to use for free online is from Finance Formulas. You simply plug your figures from your income statement into the calculator and it will determine your business’s net profit margin for you.

## What Is Considered a Healthy Operating Profit Margin?

A healthy operating margin depends on your industry and how much your business plans to grow in the future. Industries with low overhead expenses generally have a higher profit margin than industries with a higher overhead cost. So, for example, you’d expect a business consultant’s profit margin to typically be higher than that of a manufacturing business.

One way to determine whether your company’s profit margin is healthy is to compare it to a benchmark index, such as the S&P 500. In 2017, the average operating profit margin for the S&P 500 was around 11 percent. So, if your business’s operating margin is more than 11 percent, you’re outperforming the overall market, a sign of a healthy operating profit margin.