How to calculate net profit margin

Net profit margin (calculation)

Net profit margin is net profit divided by revenue, times 100. It tells you what portion of total income is profit.

Formula for net profit margin shows that net profit divided by revenue, times 100, equals net profit margin.

How to calculate net profit margin

Example of a net profit margin calculation

Let’s say your business makes $20,000 by cleaning offices. It costs you $8000 to provide those services. And you spent another $7000 on operating expenses and taxes. Here’s how to work out your net profit margin.

Step 1 example shows $20,000 minus $8,000 equals $12,000 gross profit.
Step 2 example shows $12,000, minus the sum of $3,000 plus $4,000, equals $5,000 net profit.
Step 3 example shows $5,000 divided by $20,000, times 100, equals 25 percent net profit margin

Your net profit margin shows what percentage of your revenue is actual profit after all expenses are deducted. This number shows how efficient your business is at turning income into profit.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.