How to Calculate Net Profit Margin (Profit or Loss)

By | December 12, 2021

How to calculate net profit margin – In running a business, one of the main goals that business actors definitely want is to get the maximum profit. Unfortunately, there are still many people who feel that they have made a profit when in fact they have not.

How to Calculate Net Profit Margin (Profit or Loss)
Illustration. Photo by : Pixabay.com

In general, profit is the financial benefit that a company gets by subtracting the company’s costs from its revenue. So, the value of a company’s income must be higher if it wants to make a profit.

Types of Profit

Keep in mind that there are many types of costs included in company fees. Often business actors, miss some financing so they feel they have made a profit. Therefore, before continuing on how to calculate net profit margin, it is better to know the types of profit:

1. Gross Profit

This profit is often used as a benchmark by entrepreneurs. This is the profit earned by subtracting the cost of goods sold by the revenue. In other words, the price that is taken into account here is only the variable cost. While the fixed costs are not taken into account.

In fact, in running a business, there are many fixed costs needed to run the business. So, keep in mind that even though the income is greater than the HPP, it is not necessarily a profit as a whole.

2. Operating Profit

Similar to gross profit, operating profit is the residual income from gross profit minus operating costs. What is meant by operational costs here are all costs related to company operations. For example electricity, water and the machines used.

At this stage, companies usually start to believe that the business they are running is profitable. However, this cannot be ascertained until gross profit is deducted by other costs.

3. Profit Before Tax

Profit before tax is the profit obtained by subtracting the remaining operating profit with interest expense. These costs usually arise because of a company’s capital loan in running the business.

This cost must be taken into account in profit because it is one of the components in running a business. However, if this fee is not charged, then it does not need to be taken into account.

4. Net Profit

Net profit is the profit earned after deducting the profit before tax with income tax. Business actors need to remember that paying taxes is obligatory, regardless of income. The amount of tax to be paid will be proportional to the amount of income each year. So, the greater the income, the greater the tax to be paid.

For MSMEs, to make it easier to pay taxes, it’s a good idea to record every income you get every month. This is to avoid things that are not desirable at a later date or when checked by a tax consultant.

So the four types of profit are interrelated and determine the amount of net profit earned by a company. Do not feel profit if the four costs or profits have not been deducted from the income, because that is the responsibility of the company.

How to Calculate Net Profit Margin

After knowing the types of profits and how to calculate them, you can find a way to calculate net profit margins. Here is the simple formula for calculating net profit margin:

Margin = ((Revenue-HPP-Operating Expenses- Other Expenses – Interest-Tax)/Revenue) *100%

So to be able to find out the value or profit margin, some costs that need to be recorded and known are HPP, operational costs to taxes. Don’t forget to always record the income you get every time in a certain period.

In determining the net profit margin, do not forget to specify the same time period for revenues and expenses incurred. For example, if you want to calculate net income within one year, then the total income and expenses must also use the same time.

Another way to calculate net profit margin is to subtract revenue by the types of profits that have been submitted. That way, entrepreneurs can find out where their biggest expenses are.

Other Interesting Info: How to Calculate Gross Profit, Definition, and Benefits

Example of Net Profit Margin Calculation

To better understand how to calculate net profit margin, here is an example case:

An entrepreneur owns a factory that produces clothes every day. The total HPP issued during the 2019-2020 period is IDR 40,000,000. Meanwhile, the operational cost to run the factory and to finance all of its employees is Rp. 15,000,000.

The entrepreneur is also charged an annual interest of IDR 2,000,000. Meanwhile, the tax is charged Rp. 4,000,000 per year.

For the income earned, the entrepreneur can earn up to IDR 750,000,000/year. Is it with these details, entrepreneurs experience profits? Or is it a loss?

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Here’s how to calculate net profit margin:

Margin = ((Revenue-HPP-Operating Expenses- Other Expenses – Interest-Tax)/Revenue) *100%

Margin = ((75,000,000 – 40,000,000 – 15,000,000 – 2,000,000 – 4,000,000)/ 75,000,000) * 100% = 18.67%

From these calculations, it can be seen that the entrepreneur experienced a profit of 18.67% or a profit of Rp. 14,000,000.

For a retail industry, the amount of profit is quite large and good. Because the standard net profit margin in the retail industry is 5% of total revenue.

Margin Standards in Various Industries

Another way to find out whether the business being run is good or not, is to compare the net profit results with the standard. If the value is greater, then it can be considered good and profitable to run. Meanwhile, if it is less than the standard, it needs to be developed further. Here are the details:

Construction : 5%

Retail : 5%

Restaurant : 15%

Transportation : 19%

Workshop : 12%

This standard is not standard, but can be used as a benchmark to be able to continue to develop a business. Keep in mind that profit margins depend on different factors. Some of them are the number of employees, the size of the business to the operating system. The bigger the business, the bigger the costs.

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For those who want to increase their profit margins, one way is to reduce their expenses. This can be done in various ways, such as doing work efficiency, looking for the cheapest vendor or supplier for the company’s raw materials. In addition, try to identify things that have the potential to reduce profits.

One of the biggest costs in a business is its operational costs. Some of the costs included in this cost are production costs, personnel, electricity and water. Try to reduce waste that occurs in the production process to reduce production costs.

In terms of revenue, the way to get a bigger profit margin is to increase sales. Carry out interesting activities or promotions to make people want to use the product or service. Also use up-selling and cross-selling techniques to cover products with high HPP.

One of the factors that determine the success of calculating the net profit margin is the inputted data. Therefore, it is very important for every business to have data on income and expenses. If you want to be more professional, then make monthly financial reports to facilitate the calculation of net income.

So, before announcing a profitable business or not, then use the method of calculating net profit margin with the formula above. If the result is positive, then the business is profitable. However, if the result is negative, the business suffers a loss.

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Hopefully the above information can be useful for all of you.

Regards.

Author by : Bang izal.

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