Leading Entrepreneurship

Most of us know that net profit margin (npm) is the percentage of sales remaining to fund either continuing operations or additional owners’ compensation, after deducting all operating expenses. However, how is it analyzed, and what are the cautionary tales for a high-growth firm?

If NPM is Above Industry Average
If this indicator is desirable, but your compensation margin is not, you should focus your efforts on carefully evaluating your gross profit margin or overhead for any potential overspending or unmanaged expenses.

If NPM Below Industry Average
This can be caused by numerous items, including pricing too low, costs that are to high, costs creeping upwards as volume increases, too much A/R, too much inventory, collection costs too high, high interest payments, high bad debts or sales too low.

Suggestions
A typical entrepreneur will first evaluate gross profit, then jump immediately to payroll or advertising in an attempt to cut costs. At Gambit, we strongly urge our clients to save these expenses for last and really focus on the issues mentioned above. Only after resolving operating issues should wages and marketing be cut.