In order to determine their profitability, businesses look at their total net income relative to their total sales, or gross revenue. This figure, expressed as a percentage, is also known as the business' net profit margin. This can be useful for comparing similar businesses to one another, or for comparing the performance of a business to its own historical results.
For example, if your business generally runs a 10% net profit margin, and you run a 12% margin this month, you can infer that you did a good job of controlling costs.
Calculating total monthly net income as a percentage of total revenue
The first thing you'll need to do is to determine your monthly revenue. Basically, this is all of the money your business took in from sales and other sources.
To calculate your gross profit, subtract the cost of goods sold. As an example, if you own a restaurant, this would include all of the ingredients, packaging, and other items that are sold to customers.
Next, you'll need to subtract your operating expenses, taxes, and the interest you paid on any business debts in order to determine your net income. Operating expenses include any costs of running the building, and can include (but are not limited to):
- Salaries and wages paid
- Rent or lease payments
- Depreciation of equipment, real estate, vehicles, and other capital items
- Accounting costs
- License fees
- Maintenance and repair expenses
- Office supplies
- Legal fees
- Utilities (electric, gas, water, telephone, etc.)
Once you've calculated the net income (profit), simply divide this amount by the total revenue. To convert it to a percentage, multiply by 100.
To illustrate this, let's say that you own a restaurant. During the month of January, your total revenue was $50,000, and your cost of goods sold was $15,000. So, your gross profit was $35,000 for the month.
Your various operating expenses came to $20,000, and you paid $8,000 in taxes and interest expenses. Subtracting these items shows net income of $7,000 for the month. Using this information, we can calculate your net profit margin as:
In a nutshell, net income is the amount of money your business generates after paying all expenses. And, expressing this as a percentage can be a good way to assess profitability.
Profitable businesses can make for good investments, so if you'd like to get started investing today, head over to our broker center.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.