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Successful business owners know the importance of understanding what is a good net profit margin for a small business. Once you know, you will better understand how to make the necessary changes to improve your small business’s financial health. For this reason alone, it should be as important as making a small business plan.
Your net profit margin is the percentage of profit your business generates against the total revenue of your small business. The profit and loss statement of your business will make it easier for you to understand your net profit margin.
Once you know your net profit, you can divide it by the total revenue and then multiply it by 100 to get your net profit margin. Revenue is the total amount of money a company brings in from selling its goods or services at a specific price. For example, if you sell 500 units, each priced at £20, your total revenue is £10,000.
The net profit is what you’re left with after deducing the cost of goods sold (COGS) and operating costs. COGS is the total amount you pay for labour and materials to manufacture your product. Operating costs include the likes of rent, employee benefits, payroll, travel expenses etc.
In the above example, let’s assume that your COGS and operating expenses amount to £9,000. By deducting that from your total revenue, you arrive at a net profit of £1,000. So, your net profit margin would be £1,000 divided by £10,000 or 0.1. That, multiplied by 100, will give you your net profit margin, which in this case is 10 per cent.
Conventional wisdom states that your net profit margin would be low when you start your business. This is due to low sales in the beginning. Once your sales go up, your revenue will be higher and so will be your net profit margin.
But this may not be the case forever. If your business grows quickly, you will need more employees, office space and infrastructure. These increases will increase your operating costs and decrease your profit margin.
Now that you know what is a good net profit margin for a small business, here are six ways to improve it for your small business.
Once you understand what is a good net profit margin for a small business, you’ll be on track to increase revenue, minimise expenses and maximise your profits.
How small businesses can optimise their operations and maximise their profits without any major overhauls
How to read a profit and loss statement and understand the financial health of your business