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:

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…

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.

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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.

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.

Earnings before interest and tax, also know as operating income (EBIT), is defined as a measure of a company’s profit from ordinary operations, excluding interest and tax. EBIT is also called net operating income, operating profit, or net operating profit. Calculate it using the following equation: revenues minus cost of goods sold (COGS) and other operating expenses.

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

Operating Income Explanation

Operating income is a measure of company operations. It is also one of the most common financial ratios used for valuing a company as a whole. Therefore, it is very valuable, as well, as a measure of the success of a company from period to period. Additionally, it is the measure of the ability of a company to cover costs and make profit. Operating income ratios leaves out interest and taxes, so it does not serve as a net value of the wealth created from a business. More, it is a general tool used to evaluate the operating process and efficiency which ultimately lead to company profits.

One of the overall advantages of using operating income (EBIT) over other financial ratios is in the simplicity and standardization of calculation. Though interest and taxes play an important role in the financial health of a company they do not, generally, make or break the model for success. When evaluating operating income vs net income, ask whether you need a measurement of company operations as a whole or company operations as they lead to profit.

Operating Income Formula

The operating income formula provides a simple calculation for evaluating common business models. Calculating this equation is fairly simple when one has three values: revenues, cost of goods sold, and operating expenses.

Now, you know your operating income which is an important factor of valuing a company. If you’re looking to sell your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

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The markup percentage can best be defined as the increase on the original selling price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross or profit margin. Markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods.

By definition, the markup percentage calculation is cost X markup percentage, and then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, the selling price with a 25% markup would be $125.

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125.

One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.

(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!)

Markup Percentage Example

Glen works has started a company that specializes in the setup of office computers and software. He has decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. Plus, Glen will need to set up the company software in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job what will he need to charge the company?

(Looking for more examples of markup? Click here to access a retail markup example.)

Step 1

Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers.

$2,000 + ($600*25) = $17,000 Step 2

Glen must find his selling price by using his desired markup of 20% and the cost just calculated for the project.The formula to find the sales price is:

This means that to earn the return desired Glen must charge the company $20,400. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or they can be found using the above markup formula.

Using what you’ve learned from how to calculate your markup percentage, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

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Gross margin defined is Gross Profit/Sales Price. All items needed to calculate the gross margin percentage can be found on the income statement. The margin percentage often refers to sales or profitability which may help lead to several key understandings about the company’s business model as well as how successful the company is at maintaining its cost structure to gain the proper amount of sales. Analysis of margins within a business is often useful in controlling the price in which you need to sale as well as a control on the cost associated to make the sale.

(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!)

How to Calculate Margin Percentage

In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage = (Gross Profit/Sales Price) X 100 = ($25/$125) X 100 = 20%.

Not quite the “margin percentage” we were looking for. So, how do we determine the selling price given a desired gross margin? It’s all in the inverse…of the gross margin formula, that is. By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, the selling price would be $133.33 and the markup rate would be 33.3%:

Glen charges a 20% markup on all projects for his computer and software company which specializes in office setup. Glen has just taken a job with a company that wants to set up a large office space. The total cost needed to set up the space with computer and the respective software is $17,000. With a markup of 20% the selling price will be $20,400(see markup calculation for details). The margin percentage can be calculated as follows:

Using what you’ve learned from how to calculate your margin percentage, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

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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.

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

The gross profit margin ratio, also known as gross margin, is the ratio of gross margin expressed as a percentage of sales. Gross margin, alone, indicates how much profit a company makes after paying off its Cost of Goods sold. It is a measure of the efficiency of a company using its raw materials and labor during the production process. The value of gross profit margin varies from company and industry. The higher the profit margin, the more efficient a company is. This can be assigned to single products or an entire company.

Gross Profit Margin Ratio Formula

Gross profit margin = Gross profit ÷ Total revenue

Or = (Revenue – cost of goods sold) ÷ Total revenue

(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!)

Gross Profit Margin Ratio Example

Joe is a plumber in Houston, Texas. He has recently started his company and has a lot to learn. Joe thinks he may be able to cut back on raw materials by changing his construction process. Essentially, he is wondering what is his gross profit margin rate is. He evaluates his company financials for relevant information. Once the proper numbers are found uses the gross profit margin ratio calculator on his Texas Instruments BA II. His results are shown below.

Gross Profit Margin Ratio Calculation

The gross profit margin ratio would be calculated using:

Gross profit = revenue – cost of goods sold

Example: A company has $15,000 in sales and $10,000 in cost of goods sold.

It would be expressed as a percentage of sales by:

This means for every dollar generated in sales, the company has 33 cents left over to cover basic operating costs and profit.

Gross Profit Margin Ratio Analysis

The gross profit margin ratio is an indicator of a company’s financial health. It tells investors how much gross profit every dollar of revenue a company is earning. Compared with industry average, a lower margin could indicate a company is under-pricing. A higher gross profit margin indicates that a company can make a reasonable profit on sales, as long as it keeps overhead costs in control. Investors tend to pay more for a company with higher gross profit.

Gross Profit Margin Disadvantages

Many see gross profit margin disadvantages despite the common use of gross profit margin ratios. The issue is that certain production costs are not entirely variable. Some believe that only direct materials should be included as they are the only variable to change in proportion to revenue. When applied, this new gross profit margin causes all other related costs to be transferred to operational and administrative cost categories. This tends to cause a higher gross margin percentage than originally. It is applied by certain industries and businesses instead of the more common application. This formula is:

Gross Profit Margin = (Revenue – Direct Materials) / Revenue

Easily discover if your company has a pricing problem. As you analyze your gross 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.

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?