Organizational Wellness

Net Profit Margin Explained for HR Leaders: A Guide for Strategic Decision-Making

Last Updated Sep 25, 2024

Time to read: 8 minutes

The average net profit margin is now almost 8%, according to research by NYU Stern. That may not seem so important when you’re focused on non-financial objectives like staff retention and employee engagement. But net profit margins have a more direct impact on HR departments than is often appreciated.

It’s a metric that can impact everything from training and development to talent acquisition and compensation. Here’s how to take advantage of that to achieve your HR goals.

What Is Net Profit Margin?

Net profit margin is a key financial metric that measures the percentage of profit a company retains from its total revenue after all expenses, taxes, and costs have been deducted. It's calculated by dividing net income by total revenue and then multiplying by 100 to express it as a percentage. Essentially, it shows how efficiently a company is turning revenue into profit. A higher net profit margin indicates greater profitability and financial health.

How to Calculate Net Profit Margin

You can calculate your company’s net profit margin by dividing its net profitby total revenue.

To do this, you:

Step 1: Find your net profit: This is your total revenue minus all expenses, including operating costs, taxes, and interest.

Step 2: Divide net profit by total revenue: This gives you the proportion of revenue that is actual profit.

Step 3: Multiply by 100: This converts the proportion into a percentage.

Written out as a formula, this looks like:

Net Profit Margin = (Net Profit/Total Revenue) × 100

For example, if your company has a net profit of $50,000 and total revenue of $100,000, the net profit margin would be:

(10,000/100,000)×100 = 10%

This means your company keeps 10 cents in profit for every dollar of revenue generated — that’s generally considered a healthy net profit margin.

Why Does Net Profit Margin Matter in HR?

HR professionals can use net profit margin to tie departmental strategies to broader business objectives. This can help get buy-in from leaders and save time, as the following subheadings show.

Talent Acquisition

Your company’s net profit margin can impact budget allocation. For example, if your net profit margin goes down, that could leave your department with fewer funds for non-mandatory expenses.

That could mean cutting back on advertising job postings or paying for applicants’ travel expenses, making it harder to find and recruit sought-after talent.

The opposite is also true. Achieve a higher net profit margin, and you could have more funds for talent acquisition. That can make it much easier to build a team that stands out in your industry.

Compensation and Benefits

Net profit margins can also influence the compensation, bonuses, and benefits packages your HR department can offer.

When you have a lower profit margin, you may not be able to offer industry-standard raises or bonuses. This can frustrate employees and may eventually cause them to look elsewhere for employment.

On the flip side, more profits generally mean more financial wiggle room to keep your best workers happy with great benefits like wellbeing programs.

Training and Development

Training and development budgets can also be impacted by net profit margin.

Low profit margins could leave you with little funding for developing internal talent. That can make employees feel like they don’t have much of a future with your firm. Even if workers don’t leave because of missing developmental support, they’ll likely be less effective than they would be if they had it.

But the higher your margin, the more money you have for non-mandatory expenses. That makes it easier to develop robust onboarding and training solutions.

Retention Strategies

Low pay is the number one reason people leave jobs, according to the Pew Research Center. That’s why net profit margins also have a direct impact on employee loyalty and retention. The lower your profit margins, the less you can spend on financial incentives to keep your top performers.

Net profit margins also impact how much you can spend on non-financial retention strategies like employee wellbeing programs. Put simply, it’s easier to show the kind of appreciation that retains employees when you have a higher net profit margin. This can help you hang on to more of your business assets.

Ways HR Can Increase Net Profit Margin

Financial metrics can sometimes feel out of HR’s domain. But your department can have a direct and critical impact on net profit margins.

Increasing Productivity

HR is packed with opportunities to supercharge employee productivity—from creating a positive work environment to attracting and developing top talent. Nail this, and you can give your company’s net profit margin a serious boost. More productive employees drive more revenue, period.

So, how do you get there?

Start by revamping your training program to offer personalized support that helps your team excel. Or, implement a cutting-edge performance management system to better understand employee strengths and areas for growth.

And don’t forget about initiatives like wellbeing programs and public recognition. Research from the University of Oxford shows that happy workers are 13% more productive. Invest in your team’s happiness, and watch your productivity—and profits—soar.

Reducing Costs

Net profit margin is all about comparing revenue to costs—so improving it means boosting revenue, slashing costs, or both. Tackle both sides of the equation, and you’re on track for big gains.

Increasing productivity is a proven way to ramp up revenue, but cutting costs is just as powerful. Here’s how you can do it:

Dive into workforce data to uncover areas for streamlining.

Retain more employees to cut down on hiring and training expenses.

Automate simple HR tasks to free up time and resources.

Outsource non-essential tasks so your team can focus on what really matters.

By tackling these strategies head-on, you’ll see a bigger impact on your company’s net profit margin.

Enhancing Employee Engagement

Companies with engaged employees have higher earnings per share, according to Gallup. That means driving engagement isn’t just a nice-to-have: It’s a powerful lever HR can pull to boost net profit margins.

Want to ignite engagement? Try these impactful strategies:

Build a diverse and inclusive workplace where everyone thrives.

Offer frequent, public recognition that makes employees feel valued.

Actively solicit and implement employee feedback.

Lay out clear paths for career growth that inspire ambition.

Host events that foster connection and camaraderie among your team.

How HR Departments Can Leverage Net Profit Margin Data

HR teams can gain serious insights by diving into net profit margin data. It’s not just a finance metric—it’s a window into potential opportunities for improvement that can supercharge your team’s efficiency. Ready to get started? Here’s how.

Step 1: Analyze Trends

First, zoom out and look at your company’s net profit margin over time. How has it shifted? What story does the data tell?

Let’s say you hit a 10% net profit margin in Q4 2024. That might sound great—higher than industry average—but what if it’s your lowest in three years? Suddenly, that 10% doesn’t look so hot, and your next move might need a rethink.

The key? Comparing today’s performance with historical trends. This critical context can guide smarter, more impactful HR strategies, helping you avoid missteps and uncover new opportunities for growth.

HR departments can also benefit from reviewing net profit margin data. Doing so can illuminate new opportunities for improvement, which can make your team more efficient. You can get started with the following three steps.

Benchmarking

To really understand your net profit margin, it’s crucial to compare it to others in your industry. What’s impressive in one sector could be underwhelming in another.

Consider how the average net profit margin varies widely across industries:

Banks: 31%

Computer services: 4%

Trucking 5%

Entertainment software: 20%

Think back to your 10% net profit margin. That’s fantastic if you’re in trucking or computer services, but if you’re in banking or software, you’d likely feel the need for improvement.

But don’t stop there. Dive deeper into the data behind these averages. Let’s say you’re in the steel industry, and your margin is below the 9% average. Analyzing publicly available financial data from industry leaders can reveal where you might be overspending or underperforming.

For instance, if your replacement part costs are significantly higher than a company twice your size, that’s a clue. Cutting those costs could be your ticket to boosting that net profit margin and staying competitive.

Collaborating with Finance

There’s a lot of data that goes into calculating your net profit margin, and as an HR professional, you don’t need to be a finance whiz to make sense of it all. That’s where collaboration comes in.

Start building a stronger partnership with your finance department. They can break down the numbers for you, making it easier to spot areas where HR can drive real improvements. By working together, you’ll uncover opportunities to elevate both productivity and profitability—without having to crunch all the numbers yourself.

How Net Profit Margin Impacts Employee Wellbeing

Your company’s net profit margin reveals exactly how much profit you’re making on every dollar of revenue. And HR has the power to use this metric to drive strategy decisions that align with bigger business goals.

One major key? Employee engagement. Engaged employees are more productive, and a revamped employee wellbeing program is your ticket to boosting engagement. Personalized wellness solutions keep your team happy, motivated, and performing at their best.

Wellhub makes it effortless to harness the power of employee wellbeing for your business. Ready to see your team thrive? Speak with a Wellhub Wellbeing Specialist today!

Company healthcare costs drop by up to 35% with Wellhub! (* Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.) Talk to a Wellbeing Specialist to see how we can help reduce your healthcare spending!