Continuing the series about helping you conduct an annual review of your finances, here is the third installment by Ellen O’Hara, Cockpit Arts, Head of Business Development at Cockpit Arts.
We’ve been busy working through lots of financial health checks with the makers here at Cockpit. So we’ve been having lost of discussions around net profit and the net profit margin. This ratio looks at net profit as a percentage of turnover. Net profit is calculated by subtracting all business expenses from turnover and the margin can be calculated like this:
Net profit margin = net profit ÷ turnover x 100
For example, if your business makes a net profit of £20,000 from a turnover of £70,000, the net profit margin could be calculated like this:
Net profit margin = £20,000 ÷ £70,000 x 100 = 28.5%
Our research tells us that the average net margin among designer-makers at Cockpit stand at 25%, but ranges from as little as 12% up to 40%. So our example of 28.5% is pretty healthy. A net margin of 25% means that to generate a net profit of say £35,000 you would need to aim for a turnover of:
£35,000 net profit ÷ 0.25 net margin = £140,000 turnover
For those businesses with higher net margins of say 40%, to generate a profit of £35,000, turnover only has to reach:
£35,000 net profit x 0.40 net margin = £87,500 turnover
In other words, the higher your net margin, the lower your turnover needs to be to reach a certain level of net profit.
If you’ve been in business for a while, it’s useful to compare net margins over time. Has it been improving, declining or has it stayed the same over the years? If you feel your net margin could do with some improvement, there may be changes you can make to your expenditure. And this is the area we’ll be looking at in the next post.
So what implications does your net margin have for you? Can you use it to set a turnover target? Are you performing well, or do you need to make some changes? Let us know how you compare.