Cheat Sheet of the Top 5 Business Percentages to Know
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Your vision is to know the top business percentages quickly; percent change, gross profit, operating profit, and net profit.
The word percentage comes from the Latin word “per centum” meaning “by the hundred”. There are so many ways to use percentages, however, for the purpose of this article, we are looking at common business uses that you should know off the top of your head. Although, feel free to keep this as a cheat sheet! The first one you will see is finding an inventory mix percentage, then how you look at increases and decreases over time, and finally, the top three percentages for looking at the financial health of your business: Gross profit margin, operating profit margin, and net profit margin.
What is the definition of percentage?
Think of percentage as a portion, fraction, or ratio where the total is always 100. For example, if you are 60% complete with a project, you are slightly over halfway done, or 60/100, or 60:100.
How do you find a percentage?
Percentage = (value / total value) X 100
Let’s take a simple case of blue inventory and white inventory of shirts at a factory. This factory will be used throughout the samples and we are using small numbers to keep it simple. Together, in June, you have 150 total SKU ABC shirts. You have 60 blue, and you want to know what percentage that is. You could then easily figure out how many white you have because you know your total is 150 and the total percentage has to add up to 100.
Blue shirts percentage = (60 / 150) X 100 = 40%
White shirts percentage = (1 - .4) X 100 = 60%
1. How do you find a percentage increase over a period of time?
Percentage increase = 100 X (increased value - original value) / original value
Let’s say in July, you placed an order for blue SKU ABC and now have 110 blue shirts so what percentage did blue shirt inventory go up?
Blue shirt percentage increase = 100 X (110 - 60) / 60 = 83.33%
2. How do you find a percentage decrease over a period of time?
Percentage decrease = 100 X (original value - decreased value) / original value
Let’s say in July, you forgot to place an order and now have 20 blue shirts so what percentage did blue shirt inventory go down? Assuming the shirts were sold, this would be the percentage sold.
Blue shirt percentage decrease = 100 X (60 - 20) / 60 = 66.67%
3. How to calculate gross profit margin
Gross profit margin is the total sales or revenue that your business earns, and then the cost of goods sold or COGS is subtracted. COGS include the cost to manufacture, the materials, and salaries paid to employees involved directly in producing. Note this doesn’t consider your indirect expenses such as rent, utilities, and overhead.
Why is this useful? You get insight into the expenses and profit related to manufacturing, but it’s not going to show you overall profit. You will know from this number how efficiently you are manufacturing and whether your price is appropriate. This link will take you to a handy chart of average gross margins by industry to use as a benchmark.
Gross profit margin example
Note that net sales are slightly different from revenue, as you will see in the following examples. Net sales are going to be less than revenue because you have to remove sales returns, allowances, and discounts from revenue to get to this figure. We are assuming $50,000 subtracted from revenue of $250,000 to make this example easy.
Gross profit margin = (net sales - COGS) / net sales
Gross profit margin = ($200,000 - $100,000) / $200,000 = 50%
4. How to calculate operating profit margin
Operating profit margin looks at the costs of materials, manufacturing, and salaries related to manufacturing, just like gross profit margin, and additionally, costs to get the products to customers so logistics and distribution, and then also, the cost of all staff or contractors, so R&D, sales, marketing, etc.
Why is this useful? You get insight into the cost of running your business’ regular, day-to-day but it’s not going to include debt, taxes, interest or anything else that isn’t related to operations. This number lets you know the financial health of your business overall. This expense has to be lower than revenue.
Operating profit margin example
Operating income is revenue - COGS - administrative and payroll expenses, in this case, $50,000.
Operating profit margin = operating income / revenue X 100
Operating profit margin = $250,000 - ($100,000 + 50,000) / $250,000 X 100 = 40%
What does this mean? For every $1 this factory makes, it is earning $.40 after expenses are paid.
How do you increase operating margin? One way is to reduce the COGS by getting better prices from suppliers.
5. How to calculate net profit margin
Net profit margin lets you know what you have left in profit after the operating expenses, taxes, debt, loans, and interest are paid. This is also referred to as the bottom line.
Why is this useful? This is the one that lets you know what money you have left to invest in the business after all of the commitments and taxes are paid. This is one of the most important numbers to determine a company’s financial health.
Net profit margin example
OPEX in the example is operating expenses, including rent, equipment, inventory cost, marketing, payroll, insurances, and R&D funds.
Net profit margin = Net income / Revenue X 100
Net profit margin = (Revenue - COGS - OPEX - Interest - Taxes) / Revenue X 100
Net profit margin = ($250,000 - $100,000 - 45,000 - $10,000 - $15,000) / $250,000 X 100 = 32%
In summary, all of these percentages are useful in your toolbox but like everything else, they are tools that need to be considered as part of the whole picture. One-off events and sales and outliers can cause increases and decreases so make sure to use multiple viewpoints and expertise in using these to make decisions.
References recommended to learn more about percentages
https://www.cuemath.com/commercial-math/percentages/
https://www.omnicalculator.com/math/percentage-decrease#percent-decrease-formula
https://www.investopedia.com/ask/answers/031815/what-formula-calculating-profit-margins.asp
https://www.connect2capital.com/small-business-lending-blog/average-business-expense-percentages/
https://www.investopedia.com/terms/o/operatingmargin.asp
https://www.investopedia.com/terms/n/net_margin.asp
https://www.fool.com/the-blueprint/operating-margin/
https://www.investopedia.com/terms/o/operating_expense.asp
https://www.accountingtools.com/articles/2017/5/12/net-sales