Working it out
- Revenue. Sales for the month, leaving out VAT.
- Net profit. From the income statement in your management accounts, before company tax. Your pay is a cost.
- Divide. Net profit divided by revenue.
If your accounts do not show a salary for you, deduct the pay you need first.
An illustration
The figures are invented to show the arithmetic. They are not what any business should expect.
| Revenue | R200 000 |
| Gross profit | R80 000 |
| Overheads, including R20 000 for yourself | R66 000 |
| Net profit | R14 000 |
| Net margin | 7% |
If overheads rise by R6 000, net profit falls to R8 000 and net margin to 4%.
The gap between the 40% gross margin and the 7% net margin is 33 points. That is the share of every sale that goes on overheads.
Read it against your own situation
- Last month. Is the margin rising, flat or falling?
- Your plan. Is it what you expected?
- Gross margin. Did the gross margin move as well?
What a change could be revealing
| The signal | It could be revealing | Check | You could |
|---|---|---|---|
| Net margin fell, gross margin held | Overheads have grown: rent, salaries, subscriptions or marketing | Each overhead line, against three months ago | Deal with the largest increase first |
| Both margins fell | The problem may start in cost of sales: prices, discounts or supplier costs | The gross margin page | Start there |
| Close to zero month after month | The business covers its costs but has nothing left to absorb a bad month | How close sales are to break-even | Decide whether to raise prices, cut costs or grow sales |
| Profit looks good but you take no pay | The profit may be your unpaid wage | Deduct a fair salary for yourself and recalculate | Judge the business on the figure after your pay |
| Positive in some months, negative in others | Yearly costs may be booked in one month, or sales may be seasonal | Twelve months of figures, or the same month last year | Judge it over a longer stretch, such as three to six months |
Try it
Your income statement shows net profit. If you do not receive one each month, ask your accountant or bookkeeper for it.
Questions people ask
What is a good net margin?
There is no single figure. Compare it with last month and with the margin in your plan.
Before or after tax?
Either, if you use the same one every month. Before tax makes months easier to compare.