Timberspring Loans in Belleville, Illinois shows how to calculate a net profit ratio from a business's own books before a loan request. Every figure on this page is invented to show the arithmetic.
Net Profit Percentage Calculator: Numbers a Dental Office Can Pull From Its Books
The formula is short: net profit divided by revenue, times 100. Net profit is what is left after every expense, including payroll, rent, supplies, interest and depreciation. A dental office can pull both numbers from its profit and loss statement or from the business tax return for the year.
Illustration only, invented figures: a dental office collects $1,200,000 in a year and spends $1,020,000. Net profit is $180,000, and the net profit ratio is 15.0% (our arithmetic: $180,000 divided by $1,200,000).
Collections, not production, are the revenue figure to use, because they are the money the practice actually received.
Some practices pay the owner through a salary on the payroll; others take a draw from profit. A partner may add the owner's pay back to profit to compare practices fairly, so it helps to note which method the practice uses.
Net Operating Margin Calculator and the Salon Figures Behind Retail Product
Net operating margin leaves out interest and taxes: operating income divided by revenue. For a salon it shows how much the chairs, the staff and the retail shelf earn before financing costs, which is the figure a partner compares with a new payment.
Illustration only, invented figures: a salon brings in $320,000 and spends $262,400 on operating costs, leaving operating income of $57,600 and a net operating margin of 18.0% (our arithmetic). Its retail product line sold $28,000 of goods that cost $14,000, a gross margin of 50.0% on that line alone.
Separating the retail line shows whether stocking more product is worth financing: a line that keeps half of each sale can carry a small inventory cost; a line that barely covers its cost cannot.
A salon with booth renters can show rent as revenue and leave the renters' own sales out, since those belong to the renters. The margin then reflects the salon's own chairs and retail line.
Net Profit Ratio Calculator: Inputs Restaurant Owners Already Have
Restaurant owners have every input already in their books: sales, food and beverage cost, labor, occupancy and everything else. The net profit ratio is what remains after all four.
| Line | Amount | Share of sales |
|---|---|---|
| Sales | $900,000 | 100.0% |
| Food and beverage | $279,000 | 31.0% |
| Labor | $288,000 | 32.0% |
| Occupancy | $72,000 | 8.0% |
| Everything else | $171,000 | 19.0% |
| Net profit | $90,000 | 10.0% |
In this invented year the restaurant keeps $90,000 of $900,000 in sales, a net profit ratio of 10.0% (our arithmetic).
A restaurant can track food cost and labor as shares of sales each week. The same shares, totaled for the year, are the lines of this table, and a request that shows them by month lets a partner see the slow months too.
Reading the Net Profit Ratio Calculator Result Before Food Orders
A ratio on its own says little. It means more next to last year's ratio for the same business, or next to the cost the money is meant to cover. A restaurant planning a larger food order can ask whether the extra sales, at its own margin, cover the cost of carrying the stock until it sells.
A falling ratio over two or three years is worth explaining in a funding request: a one-time repair, a new hire still ramping up, or a price increase from suppliers. A partner reading the returns will see the trend either way.
Depreciation lowers net profit without any cash leaving the business, and interest on existing debt lowers it with cash. A partner may look at profit before both to judge how much cash is available for a new payment.
From Margin to Payment: Testing Whether a New Loan Fits the Profit
Illustration only, invented figures: the restaurant above asks for a $75,000 loan at an annual rate of 10% over 60 months. That works out to about $1,594 a month, or about $19,122 over a year (our arithmetic). Against the invented net profit of $90,000, the payment would take 21.2% of a year's profit before the purchase adds anything.
If the loan pays for something that raises sales or cuts costs, add that to the profit side. If it does not, the payment comes out of the existing profit, and the ratio after the payment is the number to look at. Working capital loans, business term loans and the six funding types compared go further.
Illustration only, invented figures: if the purchase adds $30,000 a year in sales at the same 10% net margin, it adds about $3,000 of profit (our arithmetic), which covers only part of the payment. The rest comes from existing profit, and the owner can judge whether that is acceptable before applying.
By Timberspring Loans · Updated