How to Improve Net Margin

Net profit margin is a measurement of your business' net profits after taxes, divided by sales. It is used to compare profit with sales. For example, if a company has sales of $1 million, and earns $200,000 after taxes, then the net profit margin is 20 percent. The net profit is the amount left for shareholders and owners. The net profit margin is also a measure of efficiency. If activities such as administration, production and selling are inefficient, they will cost more and lead to a lower net profit margin. The key to increasing net profit margin is to increase efficiency.

Instructions

1. Use the 80/20 Pareto Rule. This principle was developed in the 1940s by quality management expert Joseph Juran, who named it after the Italian economist Vilfredo Pareto, who first noticed it. The 80/20 rule states that 80 percent of a business problems or inefficiencies have just a few key causes. For example, 80 percent of your time is taken up by just 20 percent of your customers and 20 percent of system or production problems cause 80 percent of delays. Focus your time on the 20 percent of problems that are causing the greatest decrease in profit.

2. License your products or processes where possible. Royalties from licensing or franchising can earn you money without adding to your workload or using additional resources.

3. Focus on developing products or services that are unique, profitable and that give you a competitive edge. For example, if you are selling a large range of products that earn only a very small net profit, consider reducing the number of products to those that sell best. Or, if others in your industry do not offer good service, then focus on improving service to your customers.

4. Increase efficiency by continually evaluating your processes. Move employees from projects that do not add value to those that do. Automate or outsource processes that do not add value to free up time for employees to work on more profitable areas.

5. Create new opportunities. Seek out and develop new products and services that will grow your business in the most efficient way. This can include developing new uses for your products. For example, Alliance Rubber has been manufacturing rubber bands since 1923, and they have remained an industry leader by continually finding new uses for rubber bands, such as imprinted wrist bands and rubber bands with aroma that can help students study.

References

• CNET Crave: Whiffers Scented Bands Are Smelly Study Aids; Amanda Kooser; August 2011
• "Bloomberg BusinessWeek"; Five Ways to Increase Profit Margins; Doug Hall; August 2008
• MasterCard; Increase Your Company's Profit Margin; Jo Anne Killeen
• ProjectSmart.co.uk: Pareto Analysis Step by Step; Duncan Haughey