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By: ERICSON GUIANG CERA
What is viability?
Viability is defined as the ability to survive. In a business
sense, that ability to survive is ultimately linked to
financial performance and position.
Net profit margin measures the profitability of your business. The formula is:
Net profit margin = (net income / net sales) * 100 (We multiply by 100 to make
the result a percentage)
Let's say you have net income of $100,000 and net sales of $1,000,000. What
is your net profit margin?
Well, we know net profit margin = (net income / net sales) * 100, so net profit
margin must equal $100,000 divided by $1,000,000 times 100.
(100,000 / 1,000,000) * 100
100,000 / 1,000,000 = 0.1.
The net profit margin equals 0.1 times 100.
0.1 * 100
So, the net profit margin in this example is equal to 10%.
This means that for every dollar you make in sales, you earn a dime in net
income.
Gross profit margin
Gross profit margin measures the cost of production.
The formula is:
Gross profit margin = (gross profit / net sales) * 100.
Let's say you have a gross profit of $125,000 and a net sales
of $3,750,000. What's your gross margin? Gross profit margin
= (gross profit / net sales) * 100, so in this example
Gross profit margin = ($125,000 / $3,750,000) * 100
Therefore the gross profit margin equals 0.03 times 100.
0.03 * 100
Gross profit margin = 3%
A gross margin of 3% means that out of each dollar you make
in sales; you spend a little over 97 cents to produce the
product.
Operating Margin
Operating margin tells you how much costs unrelated to producing the
product for sale are cutting into your profits. Costs unrelated to
production can include such things as general business, staff and
administrative expenses of the business. Net operating margin is often
referred to as your earnings before interest and taxes or EBIT. The
formula for this is:
Operating margin = (operating profit / net sales) * 100
Let's take a look at an example.
You have an operating profit of $90,000 and net sales of $1,000,000.
What is your operating margin? Well, we know that operating margin =
(operating profit / net sales) * 100, so:
Operating margin = ($90,000 / $1,000,000) * 100
Operating margin equals 0.09 times 100
0.09 * 100
The operating margin equals 9%.