Awhile back, we created a fast, simple tool that can help anybody make better business decisions by using simple fractions. Most people in business think in terms of cost. This tool will help you think in terms of cost and revenue, regardless of what your company role is. Thinking about both cost and revenue will make you a better steward of your company’s money, and therefore more valuable to your employer.
Look at this table and study the progression of the numbers across the rows, left to right.
| Net Profit Margin | Fraction | Revenue Multiplier |
| 5% | 1/20 | 20 |
| 10% | 1/10 | 10 |
| 14% | 1/7 | 7 |
| 20% | 1/5 | 5 |
| 25% | 1/4 | 4 |
| 33% | 1/3 | 3 |
If you paid attention in grade school, you already know the fractions associated with the percentages presented above. Your mission is to memorize the fraction that corresponds to your company’s net profit margin. Net profit margin is the percentage of what your company keeps for every dollar of revenue it brings in. Suppose your company has a net profit margin of 10%. The corresponding fraction is 1/10, and therefore your revenue multiplier is 10. Use the multiplier to make fast mental calculations to convert costs into revenue.
Continuing the example above, for your company to spend $10 off the bottom line on something, it has to first generate $100 in revenue. Think about that for a moment. The $10 box of pencils that you just bought for the supply closet really means you need $100 in revenue. To put it another way, you just bought a $100 box of pencils!
If you’re an owner of a 10% net profit business, that decision about whether or not to invest in a $30,000 machine becomes an immediate mental calculation about how likely you think it is to generate $300,000 in revenue to cover it.
Use this tool to improve your decision-making at work. Heck, use it help you think clearly about your personal choices. A 30% tax rate (assume that’s all-in) means you keep 70% of whatever you earn, so your personal “net profit margin” is 70%, which if you do the math means you have a 1.43 multiplier (1/1.43 = 70%). That $1 Slurpee you just bought required you to earn $1.43 in salary!
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