Net Profit Margin Calculator
What Is Net Profit
The purpose of any business or investment is to eventually turn a profit.
To check for the profitability of an investment, net profit is usually a very good metric to focus on.
Net profit is essentially the money that the investor or an owner of a business can keep, once all of their expenses were paid.
It is important to differentiate net profit from revenue (also called gross sales). Revenue is the money the business has made from selling its goods and services. However, the costs of running the business were not subtracted, alongside other fees like utility bills or taxes.
Revenue is an important indicator, reflecting the ability to sell. However, many businesses can sell a lot of products, yet cannot turn a good net profit due to high maintenance costs or bad pricing policies.
A business that made a revenue of $2,000 with a net profit of $1,000 is better for the owner than a business that made a revenue of $10,000 but turned only a $5 net profit.
This is not always true, as some businesses choose to turn a small net profit in the initial stages, because they decide to re-invest all of their profits back into the company. However, in the long term, every business should be aiming at turning a net profit.
Important Vocabulary
Before we move forward, we should define some concepts that will be mentioned throughout the text.
| Term | Definition |
|---|---|
| Total Revenue | This is how much money did the investment or company yield from sales of their products and services. |
| Total Cost | These are the total costs of running the business or procuring the investment. They may include a wide range of items, depending on the type of investment, such as taxes, salaries of employees, utility costs, material costs, government fees, etc. |
| Net Profit | This is the money made by the business or the investment. It is the difference between the Total Revenue and the Total Cost. |
| Net Profit Margin | This is the percentage value that expresses what part of the total revenue was the net profit. We can get it as the net profit divided by the total revenue, multiplied by 100. |
| Markup | This is the percentage value that expresses the amount added to the total cost to turn a profit. |
Calculating Net Profits and Markups Manually
In case you want to calculate the net profits yourself, you need to always know the total revenue (TR) your business has made.
Additionally, you may either work with the additional value of the net profit (NP) to calculate your costs and markup (M), or you may work with the value of total costs (TC) to calculate your results.
First, we present a simple formula demonstrating the relationship between the variables.
NP = TR - TC = TC*(M\div100)
Next, we show the formula to calculate the markup.
M = (NP \div TC)*100 \\= [NP\div(TR-NP)]*100
We can choose the appropriate formula based on what we are trying to calculate.
Worked-out Example
A business had total revenue of $20,000, with total costs of $10,000.
What were the net profit, net profit margin, and the markup for this business?
CALCULATING THE NET PROFIT
TR = 20,000
TC = 10,000
We substitute these values into the first formula.
NP = TR - TC = 20,000 - 10,000 \\= 10,000
The net profit was $10,000.
CALCULATING THE NET PROFIT MARGIN
We take our net profit and compare it to the total revenue.
(10,000\div20,000)*100 = 50%
The net profit margin was 50%.
CALCULATING THE MARKUP
We use the second formula and substitute NP and TC.
M = (NP\div TC)*100 \\= (10,000\div10,000)*100 \\= 100\%
The markup was 100%.