The Indicative Profit Margin is a margin that is used by the DTI to ensure that companies do not understate their actual Net Profit After Tax (NPAT) amount in the attempt to decrease the required spend on Enterprise Development (ED) and Socio-Economic Development (SED). The general rule is that the NPAT over Revenue of a company being measured needs to exceed a quarter of the industry norm (for example if the industry norm was 4%, then NPAT over Revenue needs to greater than or equal to 1% (i.e. 25% x 4% = 1%)).
The Indicative Profit Margin affects the calculation of the targets for ED and SED and is applied according to the following steps:
1. In step one we identify the industry within which a company falls as well as the applicable industry norm.
- As an example, we will be using the Community, Social and Personal Services industry with an industry norm of 12% (as at March 2014). Please note that this figure is updated quarterly by Statistics South Africa.
2. In step two we compare the NPAT over Revenue percentage for the current measurement period (or financial year) to a quarter of the industry norm (i.e. as per our example in step 1: 25% x 12% = 3%).
- If the company's NPAT over Revenue percentage is therefore greater than or equal to 3%, we can use the current NPAT to determine the ED and SED targets.
- If however the company's percentage is less than 3%, we go to step 3.
3. In step three we need to compare the average NPAT over average Revenue percentage over the past 5 years to the 3%.
- The average NPAT calculation works as follows: we add the current NPAT to the NPAT of the 4 previous financial periods and divided this amount by 5.
- In the same way the average Revenue is calculated by adding the current Revenue to the Revenue figures of the 4 previous financial periods, and dividing this amount by 5.
- If the company's average NPAT over average Revenue percentage is greater than or equal to 3%, we can use average NPAT to determine the ED and SED targets.
- If however the company's percentage is less than 3%, we go to step 4.
4. In this step four we need to compare the NPAT over Revenue percentage of each of the 4 previous financial periods, on an individual basis, to the 3%.
- The first financial period (starting from the most recent and working backwards) were the NPAT over Revenue percentage is greater than or equal to 3%, we use the NPAT over Revenue percentage of that financial period multiplied by the current Revenue to get an amount that is called the "deemed NPAT".
- If we can still not find a financial period (in the last 4 financial periods) were the NPAT over Revenue percentage is greater than or equal to 3%, we multiply the current Revenue by the 3% to get our "deemed NPAT".
- This "deemed NPAT" (regardless of whether it was obtained using the calculation as per bullet 1 or 2 above) is then used to determine the ED and SED target.
5. Once the above steps have been completed, we can now determine our ED and SED target by multiplying either the current NPAT (step 2), average NPAT (step 3) or deemed NPAT (step 4) by 3% (Old Codes of Good Practice) and 1% (Old Codes of Good Practice) respectively.