Tag Archives | profitability

Spot a Zombie Company

Last week, I talked with several lenders, investors, and entrepreneurs. One of the topics that kept coming up was their client’s problems wasn’t cash – even though their clients tried to convince them of it. While cash was an issue that needed to be addressed, the problem instead lies in the leadership. A few weeks ago, we discussed how zombie employees are destroying your company. But those zombie employees have developed a zombie culture! Here’s how to spot a zombie company and identify if you are one of them.

spot a zombie companyHow to Spot a Zombie Company

In any type of therapy group, the first step to recovery is admitting that you have a problem. Identification is crucial if you want to change. Therefore, we are walking through how to spot a zombie company. As it is so prevalent in our business society, it’s becoming more and more difficult to disguise.

Stay ahead of the curve and download our 3 Most Powerful Tools for free! Don’t sit back and watch your company spiral into a zombie company

#1 Status… And You Know It

Have you ever seen a company that boast it’s #1 and everyone around knows it? These companies get to the top, become prideful, and then eventually, they are overrun by zombie employees. If every single person in your company says the exact same thing, then you’re in big trouble. In order to be successful, you need people to go against the grain. That’s how innovation happens.

Enron, for example, was Fortune Magazine’s “America’s Most Innovative Company.” But nearing the collapse of their empire, innovation came to a halt as the executives became more greedy and created a culture of secrecy. They knew they were #1. So, the executives challenged anyone trying to innovate or make changes to the company. Both employers and employees lost sight of the mission and vision of their company. As a result, both parties caused (or would have caused) the death of the company.

“Do you know what it takes to make an ethical decision in the face of a group of people who are willing to go the other direction? It’s one of the most single vulnerable acts of our lives.” – Brené Brown

spot a zombie company

Happy Go Lucky

Happy go lucky is a term that means that people are cheerfully willing to have no concern for the future. Many can easily identify the difference between authentic happiness and fabricated happiness. The later wreaks of inauthenticity and feels gross. When a company culture is always happy, it may be an indicator that it’s a zombie company. In this case, you may find that both employees and employers are:

  • Ignorant of anything bad going on
  • Blindly doing their jobs
  • Hiding something from others
  • Shutting down any negative statement or critique
  • Saying positive things all the time

There’s a huge difference between a company that everyone loves working for and a company where everyone is happy. You cannot expect your employees to be happy every single day. Life happens. So if it seems like life isn’t happening at a company, then it could mean bad news.

They Don’t Change

Zombie companies simply don’t change or allow for change to happen. Because they are so laser-focused on their vision and mission, they neglect the changing world around them. Technology is changed every single day. What worked a month ago may not work today. Remember Borders? It was a popular bookstore. But while Barnes & Noble and Amazon were taking advantage of new technology (Nook, Kindle, etc.) and building an e-commerce platform, Borders did not at first. By the time they did start to change, it was already too late. While there were many other financial issues that needed to be addressed in Borders for it to survive, the key is that zombie companies don’t want to change.

Look around in your community. It’s relatively easy to spot a zombie company as the demand for change is becoming increasingly prevalent. Many leaders get overwhelmed by change, so they simply stop changing. But they are also killing their company. As the financial leader of your company, you must be willing to allow change and create change in your company.

spot a zombie company

They Know Everything

Zombie companies are comprised of “know-it-alls.” Whether it be the employers or the employees, they think they have everything under control, know everything, and don’t want to learn. What do your customers want? If the response is “we know everything already”, start running. Truth is… You don’t know your customers. They are changing every single day. Like I said before, technology is changing constantly. As a result, your customers are too. Businesses aren’t in business without your customers. So you need to be talking with your customers daily.

A couple years ago, news spread eventually but it took time to spread. Now, news spreads like wildfire and at times, it can be very overwhelming. Platforms like Facebook, Twitter, online news sources (NY Times, Wall Street Journal, etc.) force feed you content every second of the day. While you may know a lot of things, you don’t know everything. But zombie company’s think they know everything. And that’s a problem.

Challenge each of your team members to question everything you do and why you do it. Call up your customers. Learn how to improve productivity or improve cash flow. Innovate you finance, operations, and sales departments.

Is Your Company a Zombie Company?

The biggest question of the hour… Is your company a zombie company? Have we described you in the above paragraphs? We have good news… You have identified that you have a problem. And there’s a solution to reverse the effects of being overwhelmed by zombies.

Be a Financial Leader

The best way is to be an effective financial leader. At The Strategic CFO, we pride ourselves in developing financial leadership in our clients as we consult with them and coach them. Like we said before, some companies think they have a cash problem or inventory problem or economic problem… But in reality, it starts with the leadership. A fish rots from the head down, so therefore, you as the financial leader need to be a more effective leader, improve profitability, and improve cash flow.

Improve Profitability

You have set your prices, have your costs, and out comes profit. But to not slip back into old habits, you need to think of profitability improvement strategies. Click here to access one of our 3 Best Tools includes our Pricing for Profit Inspection Guide. Improve profitability by shaping your prices (and economics) to result in profits.

Improve Cash Flow

We say it frequently because it’s true… Cash is king. As a leader, you need to have your finger on cash at all times. The worst thing (and unfortunately, a common issue) is that the executive team expects cash to be there because they made their sales mark. But if someone is not watching it, it could end badly. Click here to download our 25 Ways to Improve Cash Flow whitepaper, along with our other 2 most powerful tools, to learn about cash flow improvement strategies.

Be a More Effective Leader

Zombie companies lack effective leadership. You can create success through financial leadership. That’s what we as a company lives and breathes everyday. Be a more effective leader and access our 3 best tools to start growing your company.

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Click here to access your Execution Plan. Not a Lab Member?

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Why You Need a New Pricing Strategy

Larry is operating a lemonade stand, and he thinks that his lemonade is the most valuable drink available. Because he interprets his lemonade as highly valuable, he decides to charge $85 for a glass of lemonade. Larry wonders why no one buys his lemonade. Although he may seem highly profitable when you work out his unit economics, he has not sold a single glass of lemonade. Like Larry, you may need a new pricing strategy.

What is your current pricing strategy? For example, you may be setting the prices on your perceived value of your product/service like Larry. But have you thought about how you could price your products/services better to improve your company’s profitability?

need a new pricing strategy

What is a Pricing Strategy?

To determine if you need a new pricing strategy, you need to identify what pricing strategy you are currently using.

Often, pricing is seen as the marketing and sales department’s role. But as the financial leader’s role morphs into a value adding position, you must work with every department (including marketing/sales) to be able to squeeze profits from every corner of the business.

The Variety of Pricing Strategies

When you are looking for a new pricing strategy, you should assess the different types of pricing strategies and the reasons for picking a one over another. Some of the more common pricing strategies include neutral, penetration, forward, skimming, and value-based. Although there are other strategies that we could dig into, these are among the most popular.

Neutral Pricing Strategy

The first pricing strategy that companies can use is the neutral pricing strategy. As the most common strategy, businesses price their products or services so that their customers are indifferent between a competitor’s product and yours. After taking into account all the features and benefits of the product, the price is set – essentially making you neutral in the pricing game.

While this may seem intelligent, it makes it difficult to expand your customer base as they have no real reason to choose your product over another of the same price. There is no value expressed in the neutral pricing strategy – thus, limiting the profit capabilities.

If you want to gain more profit margin, neutral pricing strategy is a safe (and ). To price your product or service correctly, download our Pricing for Profit Inspection Guide whitepaper!

Penetration Pricing Strategy

If you want to be more aggressive than the neutral pricing strategy, you may want to choose the penetration pricing strategy. This strategy is used to gain market share, but it has several drawbacks. For example, price wars can start between competitors. Because you don’t want to lose your market share, you may be tempted to lower your prices. But your competitors will likely lower their prices as well to compete for their customers. If you continue to lower your prices, your margin will be squeezed until you are unprofitable.

Grocery stores most commonly use the penetration pricing strategy. Most recently, Amazon acquired Whole Foods (a traditionally expensive grocery store chain) to compete with other grocery stores such as Walmart, Target, Kroger, and other local stores. As Whole Foods slashes their prices, stock prices in major grocery stores have declined in anticipation of them having to reduce their prices to compete. It’s too soon to see the result of implementing a penetration pricing strategy; but unless these stores gain more customers or offer other profitable products, they will become less profitable.

Forward Pricing Strategy

Like the penetration pricing strategy, a forward pricing strategy focuses on the future costs associated with that product or service. Companies are willing to price below cost of goods sold at first if they know that in the future, they will have higher margins. If a company cannot predict that if they sell X units by Y date, then having a forward pricing strategy may not be the best strategy for your business.

If you need a new pricing strategy, you need to think about pricing for profit. Download our Pricing for Profit Inspection Guide to learn if you have a pricing problem and how to fix it.

Skimming Pricing Strategy

Converse to the penetration pricing strategy, skimming pricing strategy allows companies to segment the market to gain access to those customers who are willing to spend more per unit. Most commonly, a company utilizes skimming at two different periods in the product life cycle, the beginning and the end of the product’s life.

Apple’s Skimming Pricing Strategy

For example, businesses that are in a semi-monopolistic positions use the skimming pricing strategy when launching the product. Think of the iPhone. Apple set their prices for the iPhone high as they were only wanting to sell to those customers with the willingness and ability to pay. As that small market depletes or slows down, Apple reduces their prices to sell to the next tier and then the next. Recently, Apple released the next generation of iPhones – iPhone 8 and iPhone X. If you’re looking to access the iPhone 8 with 256GB, expect to pay $849. You can get the iPhone X for $1,149 with the same storage as the iPhone 8.

If you look at the prices of each of their products, expect to pay 2-3 times as much for a similar product compared to other competitors. So how are they so successful? Apple has created a culture in which people are willing to spend a large amount to remain in the Apple community. Unfortunately, not every company will be able to replicate Apple’s pricing strategy. But it’s important for you as a financial leader to study what other brands are doing in regard to pricing.

Value-Based Pricing

Ask yourself this question: How much is your customer willing to pay for your product or service? There is a price that your customer is willing to pay for something without having any knowledge to how much it costs to produce or anything else. Value-based pricing is the next pricing strategy. While implementing this strategy is not simple, you can potentially gain more profit than using any other pricing strategy available.

In business school, students are taught to use the cost-plus method. Instead of adding value with their product, business leaders simple decide on the margin that they would like to have. There’s no real thought process in cost-plus pricing, but it is an easy way to bypass your customer and be in sync with your competitors.

For example, Apple has created a value for its products. They didn’t decide on a margin, but instead established such a perceived value that people cannot wait to get their hands on the next product. Some have converted all their technology over to Apple because of that added value. It’s not going to be the cheapest technology on the market and may not even be the best. But the customer is willing to pay for it at the price Apple has set. According to CNN, Apple is worth $750 Billion so they are doing something right!

need a new pricing strategyWhy You Need a New Pricing Strategy

Unfortunately, your company may be pricing your products or services too low (or too high). And your customers are not buying. You may need a new pricing strategy. Ask yourself some of the following questions:

  • When did you last interview your customers about your pricing?
  • When did you review your pricing strategy last?
  • Have you ever tested your pricing on different groups?
  • Which markets have you not be able to get into yet?

Pricing is the basis of your business and is the most important factor in profitability. If your company is solely relying on something other than pricing to improve profitability, you may need to assess why.

Buttress The Business

As you decide if you need a new pricing strategy, assess whether your pricing is a buttress of the business. We can agree on the fact that businesses exist to provide real value. Your business should be structured to support and validate the reason for the price per unit (and the value provided). McKinsey & Company highlights that most businesses do not pay enough attention to their pricing!

Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.

Increase Profitability

Price Intelligently references to a “landmark study [that] was published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, both senior pricing folks at McKinsey and Company. The dynamic pricing duo studied the unit economics of 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively)” Having a value-based pricing strategy will improve your profitability. If you are looking to drive more profits this next quarter, you need a new pricing strategy. To learn how to price for profit, download our Pricing for Profit Inspection Guide.

need a new pricing strategy

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Selling Your Business

Companies are constantly being bought and sold; so regardless of what position you are in or what industry you service, selling your business is one of those topics you need to know about.

It’s a common misconception that the financial persons are overhead, are not valuable, and simply just count the numbers. But over the past 25 years, we have been converting those battling that stereotype into financial leaders. In the case of selling your business, a financial leader will do more than just put a nice price tag on the company, but transform it into a more profitable, more attractive company.

But why would someone want to sell their perfectly good company in the first place?

selling your business

Why would you want to sell your company?

For an entrepreneur, selling your business is either one of two things: an unwanted but necessary action OR an opportunity to move onto the next venture. There are several events that could cause someone to sell their company. Those might include retirement, relationship issues, an illness or death, or the inability to perform financially (resulting in bankruptcy). Conversely, those in the business to sell might be bored, wanting more innovation and excitement.

Any of these reasons are not wrong; however, it should be important to you to want to get the most value of of your company in the case of a acquisition or merger.

Wanting to sell your company? You need to access our free Top 10 Destroyers of Value whitepaper to make sure you don’t have any destroyers in your business impacting the value of your company! Click here to download.

How would sell your company?

There are a couple different ways that one could go about selling their company. The US Small Business Administration (SBA) argues that “If you have decided to get out of business and are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy.”

Liquidation is often used when your company is insolvent or unable to perform financially. This practice is often used to pay off any debt the company might have. Whenever a company is facing bankruptcy, debt restructuring is a vital part of the process to protect the debtors.

You could also sell off parts of the company, such as a practice, a product/service, talent. The reason why most companies would do this is because they have a product or service that doesn’t quite fit into their company. It’s the black sheep of the family! To create more of a synergistic entity, owners sell a part of the company or buy a part of another company. The goal of mergers and acquisitions to to bring more focus to the most profitable side of your business.

Or you could sell the entire company… Now there are two ways to sell the entire company: sell the assets (see above) or sell the stock. The later is more beneficial for the seller than the buyer. An article in the Wall Street Journal compared asset sales to stock sales and concluded that “Stock purchasers… are buying the company itself and thus are exposed to all of its potential problems.”

Valuing Your Business

Regardless of whether you are selling your business right now or not, it’s important to value your business. This just-in-case action will a) speed up the process if a buyer does come around, b) immediately add value to your company by addressing needs, and c) start the brainstorming session to improve your business. Valuing your business now will mean for a better future.

selling your business

Beware of Those Destroyers

As you are valuing your business, find those “destroyers” that greatly impact the value of your company and take steps to address them immediately. What is a destroyer? We have partnered with Professor of Entrepreneurship at Rice University Al Danto to identify what areas in a business that destroy the value of your company. (You can access his free whitepaper here.)

The two most common destroyers that we see with our clients starts with the leader and the consistency of revenue.

Start with yourself… Are you destroying your company? Something at The Strategic CFO that we’ve always said is that the fish rots from the head down. If the leader of the company is not leading well, manipulating the team, abusing its employees, not managing well, or getting involved in illegal practices, then the business will loose major value. Suppose you are in a situation where you feel you are destroying your company, where do you start? First, do a self assessment on yourself. Then, interview your team on what you can do to change. Finally, put everything you learned into practice. Continue to do these three steps until you see major change in the success of the company.

As a financial leader, it is also your responsibility to communicate the consistency (or inconsistency) of your company’s revenue stream(s). Honesty is key in the financial world. Are you consistent or inconsistent? If the company has inconsistent revenue streams, present solutions to your management team to develop consistency. Buyers are willing to take risks, but they will choose a company that has more consistent revenue than a company that does not.

If you want to learn about the top destroyers of value, click here to download the free Top 10 Destroyers of Value whitepaper.

Prepping Your Company for Sale

The best prep you can do when preparing your company for sale is to actually prepare. What does this mean exactly? Clean up the books. Tidy up any loose ends. Address any issues you feel a buyer would be turned off from. Reflect on past performance, then focus the company to be more attractive to any buyer.

In addition, start the process of valuing your business, improving cash flow, and maximizing profitability.

Value Your Business

There are different methods to value your business, but the most commonly used method is EBITDA valuation. Reach your industry to figure out the most commonly multiple of EBITDA used in mergers and acquisitions. Once, you pinpoint that multiple, plug it into the following formula: Enterprise Value = Multiple * EBITDA

What is your business worth?

Improve Cash Flow

Cash is king. You have probably heard that a million times throughout business school and in your career. That statement cannot be emphasized or repeated enough because without cash flow, there is no business. Prepping your company for sale includes unlocking cash in your business.

Maximize Profitability

How profitable is your company right now? Focus on maximizing the profitability of your company. If the focus of your entire team is to maximize profits and cash flow, great things will follow. If you’re in position to sell or just want to prepare for a potential sale, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

selling your business

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The Power of Keystone Habits

The Power of Habit bookHabits are powerful.  They save time, create efficiency and allow our brains to focus on more complex tasks.  They can emerge without our consciousness, or be deliberately designed.

Some habits have the power to start a chain reaction, changing other habits as they move through the organization.  These are called keystone habits and they are important because they help other habits flourish by creating small wins.  Keystone habits start a process that, over time, transforms everything.

Charles Duhigg introduced this idea in his book, The Power of HabitThe book provides this example of a keystone habit…

“Typically, people who exercise, start eating better and becoming more productive at work. They smoke less and show more patience with colleagues and family. They use their credit cards less frequently and say they feel less stressed. Exercise is a keystone habit that triggers widespread change.”

Examples of Keystone Habits

Many organizations grow profits by focusing on a keystone habit. If a financial leader, be it the CFO, entrepreneur, controller, or CEO can understand and promote his or her organization’s keystone habit, profits will follow.  Here are a few examples of companies that saw dramatic bottom-line improvements by focusing on their keystone habits.

Alcoa

alcoa logo

Company: Alcoa

Keystone Habit: Safety

Result: 5x increase in net income and $27 billion increase in market cap

When Paul O’Neill took over the helm of Alcoa in 1987, he made a statement that sent investors running for the doors to dump their stock.  His statement…  “I want to talk to you about worker safety”.  But what O’Neill realized is that focusing on the company’s new keystone habit of safety would cause a trickle-down effect to the bottom line.  If employees work more safely, there are fewer injuries and production slowdowns resulting in improved productivity.

In addition to becoming one of the safest companies in the world, Alcoa’s focus on its keystone habit of safety enabled it to increase profits and market capitalization.  Someone who invested a million dollars in Alcoa on the day O’Neill was hired would have earned another million dollars in dividends while he headed the company, and the value of their stock would be five times bigger when he left.

Read the full story here.

Marco’s Pizza

Marco's_Pizza

Company: Marco’s Pizza

Keystone Habit: Accountability

Result: Increase Unit Level Profitability by 1.8 Points of EBITDA

Ken Switzer, CFO of Marco’s Pizza, has seen the privately-held chain of pizza restaurants grow from 30 stores to over 600 during his 27-year tenure with the company.  What does he credit with the company’s success?  Their focus on the keystone habits of accountability and profitability.

Marco’s has found that one of the biggest keys to fostering employee accountability is their incentive compensation plan.  Every single employee at the national support center in Toledo has a significant bonus opportunity based on achieving franchisee profitability goals. That is the sole factor in about 40% of the bonus opportunity for employees.  Tying a significant portion of employee compensation to achieving goals has fostered a sense of “we’re all in this together” that results in more employee engagement.  When you’re in that team environment, people just talk more and work well together.

Read the full story here.

Frito-Lay

frito-lay-logo

Company: Frito-Lay

Keystone Habit: Logistics

Result: 6% Compound Annual Growth Rate on Core Operating Profit

How does Frito Lay keep its spot at the top of the snack food chain?  By focusing on its keystone habit of productivity.  According to president Tom Greco, “we believe the productivity opportunity is significant.  Our productivity agenda pursues cost-reduction and capability-building initiatives to deliver results.”

In 2012, the company rolled out a geographic enterprise system (GES) developed to reduce the amount of manual handling throughout the supply chain and drive productivity.  According to Greco, “GES is both a productivity generator and a growth enabler. Productivity allows us to invest in our growth”.

Read the full story here.

Google

google log

Company: Google

Keystone Habit: People

Result: People that can pick up the slack when executive plans fall short

It can be said that Google is picky about the people it hires.  They focus on choosing, developing and empowering “smart creatives”—professionals with the technical skills to solve problems as well as the imagination to dream up new ideas.  They argue that the people are what create value, not the execs with a “plan” so they invest in their people.

In order to succeed in the business of solving problems, Google needs to constantly be creating new value.  They need good people to invent these new products and processes.  Focusing on their keystone habit of people has allowed Google to maintain its edge in a competitive industry.

Read more here.

Domino’s Pizza

dominos pizza logo

Company: Domino’s

Keystone Habit: Taste

Result: Increased profits 16% in Q3 2014

Had a Domino’s pizza lately?  In case you’ve missed their self-deprecating commercials, Domino’s has recently undergone a taste renaissance.  Spurred on by negative consumer comments about their pizza, the chain has revamped their recipes in an attempt to make their food taste better.  Check out this video detailing how focusing on the keystone habit of taste has allowed them to rebuild their reputation and gain market share.

Click here to read more about Dominos and check out their turnaround story.

Conclusion

Keystone habits say that success doesn’t depend on getting every little thing right, but instead focus on identifying a few key priorities and developing them into powerful levers.  Where to start in identifying your company’s keystone habit?  Look at those habits that, when they start to shift, dislodge and remake other patterns.

I’ll leave you with this quote from Charles Duhigg in The Power of Habit:

“Destructive organizational habits can be found within hundreds of industries and at thousands of firms. And almost always, they are the products of thoughtlessness, of leaders who avoid thinking about the culture and so let it develop without guidance. There are no organizations without institutional habits. There are only places where they are deliberately designed, and places where they are created without forethought, so they often grow from rivalries or fear.”

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

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What Business Issues Keep You Up?

As a business owner, I often find myself lying awake at night worrying about issues my company is facing.  Are we making as much money as we should be?  How is my cash flow?  Do I have the right team to grow the business?  These are just a few of the questions that cause me to lose sleep.

What Business Issues Keep You Up?

My guess is that I’m not alone in my insomnia, and I was curious to know what issues are keeping others up at night.  I put together a brief survey of some common business issues and solicited responses from my clients, colleagues, referral partners and members of our LinkedIn group.  I asked them to rate these issues on a scale of 0 (sleeping like a baby) to 5 (Ambien please!).  Here are the results so far:

 

up at night survey graph

 

Based upon these results, it appears that cash flow issues are currently demanding most of your attention.  Not surprisingly, managing growth comes in a close second as rapid growth is often the chief cause of cash flow problems.  I’m curious to see if turnover will become more of an issue as the economy continues to stabilize and employees begin to seek new opportunities.

What financial issues do you think are the most pressing for your company?  We’d love to have your input, so click here if you haven’t had a chance to submit your answers yet.  Stay tuned for updated results…

To learn more financial leadership skills download the free 7 Habits of Highly Effective CFOs.

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Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

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Net Profit Margin Analysis

See Also:
Net Profit Margin Ratio
Gross Profit Margin
Opportunity Profit Margin Ratio
Financial Ratios
Net Income
What is Profitability Index (PI)?

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.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

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.

Net Profit Margin Analysis

Strategic CFO Lab Member Extra

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

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Net Profit Margin Analysis

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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Operating Profit Margin Example

See Also:
Operating Profit Margin Ratio Analysis

Operating Profit Margin Example

Bill is the founder and CEO of a retail store called Shopco. Shopco recently took a loan. Shopco has experienced a dip in sales, because of the recession, and wants to make sure they can keep net operating profit margin ratio above the limit in their loan agreement. If not, Shopco may have their loan revoked. Shopco decides to prepare for this scenario by looking at their books and finding all relevant numbers. Bill then performs the calculation below.

Revenue $ 1,000,000 Cost of Goods Sold $ 500,000 Gross Margin $ 500,000 Operating Cost $ 250,000 Interest Expense $ 25,000 Operating Profit $ 225,000 Operating Profit Percentage 22.5%

Shopco was required by the bank to maintain an operating profit margin about 10%. After performing the calculation Bill now knows that his operating profit margin ratio calculation is above this. Bill is very relieved and has the confidence to make it through his time of difficulty.

Operating Profit Margin Meaning

The meaning of operating profit margin varies slightly, although the basics stay the same across all industries. This makes it a common and important metric. Operating profit margin ratio analysis measures a company’s operating efficiency and pricing efficiency with its successful cost controlling. The higher the ratio, the better a company is. A higher operating profit margin means that a company has lower fixed cost and a better gross margin or increasing sales faster than costs, which gives management more flexibility in determining prices. It also provides useful information for investors to determine the quality of a company when looking at the trend in operating margin over time and to compare with industry peers.

There are many ways for a company to artificially enhance this ratio by excluding certain expenses or improperly recording inventory. Revenues may also be falsified by recording unshipped products, recording sales into a different period than they actually occurred, or more. Usually, it serves more as a general measurement than a concrete value.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Operating Profit Margin Example

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Operating Profit Margin Example

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