How to calculate your return on sales

The effectiveness of your own business, as well as the economic performance of a trading company, is best assessed in terms of sales profitability. Indeed, very often the owners of the enterprise take an increase in gross turnover as an indicator of success. However, in practice, only profitability reflects the real picture of things.

You will need

• - performance indicators of the company;

• - calculator.

Instruction manual

1

Return on sales is expressed in a certain ratio, the dynamics of which you can compare in different reporting periods. First, determine the period for which you will calculate the return on sales, for example, a year or a quarter. Determine the two main quantities necessary to search for this ratio: net profit and total sales revenue. Net profit is the part of gross profit remaining on the balance sheet net of taxation (after payment of all tax deductions and contributions to the budget). It serves to pay dividends to shareholders, renewal of fixed assets and development of the enterprise.

Sales revenue is the total amount of income received as a result of sales of goods, services and works.

2

Once you have calculated these two values, you can determine the coefficient of profitability of sales. Divide the net profit by the revenue from sales, and you will find out the profitability. Suppose, the year before last, the revenue from sales was 3.5 million rubles, and the net profit was 900 thousand rubles. Thus, the profitability ratio of sales = 0.9 / 3.5 = 0.2571, i.e. 25.71%. And last year, sales revenue amounted to 3.7 million rubles, and net profit - 950 thousand. Profitability ratio - 25.67%. This example clearly demonstrates that an increase in revenue and net profit does not mean an increase in profitability, since the profitability ratio decreased by 0.04%.

With such data, company managers can make decisions to optimize the business and find the reasons for the reduction in profitability.

3

For a more complete picture of the company's performance, calculate the return on sales at several levels. For example, for a single group of goods or for each major customer. This technique will allow you to draw more accurate conclusions about the prospects of work. Perhaps you will refuse certain products or optimize your work with the customer base.

note

The drop in sales profitability is an alarming signal requiring operational decisions. A thorough analysis of the financial activities of the enterprise is necessary to eliminate the causes of this trend.

Useful advice

Profitability can be influenced by objective environmental factors that are in no way dependent on your work: fuel prices, exchange rates, political and climatic situations. Take these factors into account.

• Sales Profitability Assessment (Eng.)
• how sales profitability is calculated