# Net Profit Margin Definition

The net profit margin, also known as net margin, indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit. Net profit margin analysis is not the same as gross profit margin. Under gross profit, fixed costs are excluded from calculation. With net profit margin ratio all costs are included to find the final benefit of the income of a business. Similar terms used to describe net profit margins include net margin, net profit, net profit ratio, net profit margin percentage, and more. To calculate net profit margin and provide net profit margin ratio analysis requires skills ranging from those of a small business owner to an experienced CFO. As a result, this depends on the size and complexity of the company.

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## Net Profit Margin Calculation

For example, a company has \$200,000 in sales and \$50,000 in monthly net income.

Net profit margin = \$50,000 / \$200,000 = 25%

This means that a company has \$0.25 of net income for every dollar of sales.

Steve has \$200,000 worth of sales yet his net income is only \$50,000. By decreasing costs, he can increase net income. In conclusion, he evaluates his decision and decides to implement the online system he was thinking about.

Net margin measures how successful a company has been at the business of marking a profit on each dollar sales. It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control. Compared with industry average, it tells investors how well the management and operations of a company are performing against its competitors. Compared with different industries, it tells investors which industries are relatively more profitable than others. Net profit margin analysis is also used among many common methods for business valuation.

Easily discover if your company has a pricing problem. As you analyze your net profit margin, it’s an opportune time to take a look at you pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

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Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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# Cost of Goods Sold (COGS) Definition

Cost of Goods Sold (COGS), defined as the inventory expense that is sold to customers and is known as the largest expense to a company. It is also referred to as the Cost of Sales, and the two are used interchangeably.

## Cost of Goods Sold Explained

Cost of Goods Sold, explained as being an expense, has a direct correlation with the inventory which is considered an asset. Derive the COGS equation from the inventory which will be shown later. In addition, the Cost of Sales falls right underneath the Revenue or Sales on the Income Statement. In fact, the Gross Margin is the result of Revenue minus the COGS. Also, divide the Cost of Goods Sold by Sales to find Gross Profit Margin percentage. The Gross Profit Margin percentage gives a company insight into what they need to charge for a certain product. Or they may find a component of the Cost of Goods Sold expense to reduce.

### Cost of Goods Sold Formula

The formula or Cost of Goods sold equation is as follows:

Cost of Goods Sold Beginning Inventory
+ Net Purchase (raw materials, labor, and overhead)
= Cost of Goods available for sale
–  Cost of Goods Sold ending inventory
= COGS

### Example

Printer Inc. sells printers and other computer components to the the general public. Peggy an accountant is in charge of the inventory and Cost of Sales as it posts to the income statement. She finds the following numbers:

Beginning Inventory = \$20,000
Manufacturing or Purchase Costs = \$120,000
Ending Inventory = \$30,000

Then calculate the Cost of Goods Sold as follows using the formula above:

\$20,000 + \$120,000 = \$140,000 or the Cost of Goods available for sale

\$140,000 – \$30,000 = \$110,000 or the Cost of Goods Sold

When you know how to calculate COGS, you will better manage your company’s financials or economics. If you want to learn how you can add more value to your organization, then click here to download the Know Your Economics Worksheet.

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# Define Comprehensive Income

Define Comprehensive Income as the overall change in wealth for a company during a period. This includes not only the growth through income and size but also reflects equity changes among the firm as well as market conditions that arise. All of this information is generally summarized on the comprehensive income statement.

## Meaning

This type of accounting was established to try and gauge a company better because it is left out of the calculation of net income. This was done because the items in comprehensive income do little to gauge the economic performance of the company. However, this type of income and net income differ in that the comprehensive income effects the assets and liabilities that are reported on the balance sheet.

## Comprehensive Income Formula

Use the following comprehensive income formula:

Gross Profit Margin (RevenueCOGS)
Operating Expenses
(+/-) Other Income items
(+/-) Discontinued Operations (add if savings, subtract if loss)
Comprehensive Income

## Comprehensive Income Example

For example, Casa entertainment is a company that provides VHS, DVD, TVs, as well as speaker system products to it’s customers. The company invest in securities on the side. They recently discontinued its VHS operation due to the fact that it has become unprofitable. Finally, the company asked Annie an accountant to calculate the comprehensive income given the following information for Casa Entertainment:

Gross Profit = \$20 million
Operating expenses = \$5 million
Other Income (Profit in Security Investments)= \$2 million
Discontinued Operations (Savings from disposal of VHS operations) = \$1 million

Thus using this equation above comes out to \$18 million dollars.

If you want to learn how to price profitably, then click here to download the free Pricing for Profit Inspection Guide.

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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