As a business owner, your primary goal is profit. Two of the most common objectives of calculating profit are net profit and gross profit margin. These calculations are extremely similar but they give you slightly different information. The net profit tells you how well your business is doing as a whole. This number accounts for all expenses, including permanent fixtures like office space, equipment and employees. The gross profit margin analyzes input versus output: how much you make on each product, once you subtract its creation cost. This is a good tool for analyzing the profitability of various business lines.
Simple Net Profit Margin
Sum up the total amount of gross revenue you earned for the analysis period. This is all money that came in the door from sales of your products.
Add together the specific costs of making the products you sold. This number is your variable expenses.
Calculate your operating costs for the period. This includes things like office space rental, employee salaries and other standard expenses. These are your fixed operating costs.
Subtract your fixed operating costs and your variable expenses from your gross revenue. This is your net profit for the period.
Express the net profit as a percentage by dividing it by your total revenue and multiplying that number by 100. This percentage tells you what portion of each dollar you make is pure profit.
Gross Profit Margin
Total up the gross revenue for the period. Do this on a product-by-product basis if you want to determine which items are generating the most profit for your business.
Tally the cost of making the items and total it. Use only the input costs for the product itself, not your operating expenses. Again, sum this up by product if you like.
Subtract the total cost from the gross revenue. This is your gross profit margin.
Divide your gross margin by the gross revenue and multiply by 100 to get a percentage. You can compare the percentages for each product or product line to determine what parts of your business are generating the most profit.