Product profitability. How to calculate return on sales: what is it and how is it calculated Return on sales is determined

Any activity related to sales is carried out with the aim of making a profit. It is the actual sale that provides income to the business, because at this stage the company receives money from the client. Profit, in turn, is the main goal of business as such. In order to achieve it, it is not enough to simply make sales. They need to be profitable. Simply put, they are effective. Assessing profitability of sales is a comprehensive approach, which we will talk about.

Definition of “profitability”

Return on sales, or return on sales ratio, is an indicator of the financial performance of a company, demonstrating what portion of its revenue is profit.

If we express this concept as a percentage, then profitability is the ratio of net income to the amount of revenue received from the sale of manufactured products, multiplied by 100%.

Thanks to the profitability indicator, one gets the impression of the profitability of the enterprise’s sales process or how much the products sold pay for the costs of their production. Thus, the costs include: the use of energy resources, the purchase of necessary components, and staff working hours.

When calculating the profitability ratio, the volume of capital of the organization (volume of working capital) is not taken into account. Thanks to the data obtained, you can calculate how successfully competing enterprises operate in your field of activity.

What does profitability ratio mean?

Thanks to this indicator, you can find out how profitable the company's activities are. You can also calculate what share falls on the cost price after the products have been sold. Having an idea of ​​the profitability of sales of its products, the company can control all costs and expenses, as well as adjust its pricing policy.

Important! Different manufacturing companies produce a wide variety of products, and to sell them they also use different strategic and tactical ways and advertising techniques, therefore the value of their profitability ratios will be different. Even if two firms producing goods received the same revenue and profit, and also spent the same amount on production, then after deducting tax costs, their profitability ratio will be different.

Also, the planned effect of long-term investments will not be a direct reflection of profitability. If an enterprise decides to improve the production technological cycle or purchase new equipment, then for some time the resulting coefficient may decrease significantly. However, if the sequence of introduction of new technologies and equipment at the enterprise was determined correctly, then over time the company will demonstrate increasing profitability indicators.

How is return on sales calculated?

To calculate the profitability of sales, use the following formula:

ROS = NI/NS * 100%

• ROS— Return on Sales – profitability ratio, expressed as a percentage.
• NI— Net Income – data on net profit expressed in monetary terms.
• N.S.— Net Sales - the amount of profit that the company received after selling products, expressed in monetary terms.

If the initial data is correct, then the resulting formula will allow you to calculate the real return on sales and find out how profitable your company is.

Calculation of a company's profitability using an example

When starting calculations, it is necessary to remember that using a general formula you can find out how effective or ineffective the enterprise’s activities are, but it will not allow you to find out in which part of the production chain there are problems.

For example, a company analyzed its activities and received the following data:

In 2011, the company made a profit of 3 million rubles, in 2012 the profit was already 4 million rubles. The amount of net profit in 2011 amounted to 500 thousand rubles, and in 2012 – 600 thousand rubles.

How can you find out how much profitability has changed over two years?

Calculations show that in 2011 the profitability ratio was:

ROS 2011 = 500000/3000000 * 100% = 16.67%

ROS 2012 = 600000/4000000 * 100% = 15%

Let's find out how much profitability has changed over the estimated time:

ROS = ROS2012 – ROS2011 = 15-16.67 = - 1.67%

Calculations showed that in 2012 the company's profitability decreased by 1.67%. The reasons for the decline in profitability are not yet clear, but they can be found out if you conduct a more detailed analysis and calculate the following indicators:

1. The change in tax costs that is needed to calculate NI.
2. Calculation of profitability of manufactured goods. Produced according to the following formula: Profitability = (revenue - cost - expenses) / revenue 100%.
3. Profitability of sales personnel. For this, the formula is used: Profitability = (revenue - salary - taxes) / revenue 100%.
4. Advertising profitability of manufactured products. It is calculated using the following formula: Profitability = (revenue - advertising costs - taxes)/revenue * 100%.

When calculating these indicators, it is necessary to take into account the following features of the production process:

1. If the company is engaged in the provision of services, then the cost includes: organizing workplaces for sales specialists. For example, you need to purchase computers. Rent a room, allocate a telephone line, pay for advertising, purchase software for work and pay for a virtual PBX.
2. When calculating the profitability of sales specialists, you can use a fairly simple formula - divide gross profit by total revenue. But it is better to use it when working with specific indicators: the profitability of each specialist, a specific type of product, or a section on the website.

What factors influence profitability of sales?

You can increase the profitability of sales if you reduce the cost and level of expenses. However, this must be done thoughtfully and carefully, since such savings may reduce product quality or negatively affect the work of staff. To avoid this, you should take a comprehensive approach to the issue of increasing profitability and study the following aspects:

• Staff efficiency.
• Sales channels.
• Competing companies.
• Sales and cost process.
• Efficiency of working with CRM.

Once these components of the business have been studied, you can move on to developing sales strategies and tactics. It is also important to understand how profitable each group of products is individually.

For example, a company offers clients three types of real estate for rent:

• Residential.
• Warehouse.
• Office.

Having applied calculations, we obtained the highest rates of return on sales for residential real estate, so we can increase the costs associated with this group of services, as they will pay off.

Increasing profitability in many cases also depends on the human factor, for example, on the level of employees involved in the production process, so the business owner needs to pay attention to:

• Effective use of specialist knowledge.
• Improvement of employee qualifications.
• Optimizing costs for specialists who are not directly involved in the production process.
• Introduction of automated systems and innovative technologies.

Profitability may also depend on the industry. Thus, the heavy engineering industry shows a slow increase in sales profitability, and the highest rates can be observed in the trade or mining industries. For example, in 2014, the highest profitability indicators were noted in the chemical industry - 16.7% and in the field of subsoil development - 24-33%.

Profitability is influenced by the following features of the enterprise:

• Seasonality of sales.
• What activities does the company engage in?
• The area in which the company sells its products (regional characteristic).

Ways to increase profitability

The profitability indicator does not always meet the expectations of business owners. In this case, it is important to find the reasons for low profitability and ways to eliminate these reasons. There are many options for getting out of the situation; we tried to highlight the main ways to increase the profitability of sales.

We reduce costs. Reducing the cost of goods is the best incentive for profit growth. The main thing is not to do this at the expense of quality. It’s better to optimize logistics, work on the professionalism of managers, and negotiate more favorable terms with the supplier.

We are raising prices. A difficult step that few are willing to take. Despite the fact that indecision in this matter is precisely the main mistake. Dumping is the path to killing business. Prices can and should be raised. You just need to do this wisely. Firstly, no sudden jumps. Secondly, be sure to warn customers ahead of time that prices are about to increase. This is an unspoken rule of good manners and a way to maintain trust in yourself and your company.

We focus on the client. For any product, the main thing is not the price, but the value that it represents for the buyer. The sales description should describe in detail what the main advantage of the product is, what problems it helps to solve, etc. This should be information that will force the client to buy the product right here and now. If a person understands that you are really giving him the best offer, then raising the price will fade into the background for him. Naturally, for our part we need to ensure good quality of goods and service. No sales text will help you if you don’t properly organize delivery or if you sell outright nonsense to people. And on the contrary, with a loyal attitude, a person will become your regular customer.

And achieving a loyal attitude is simple: meet halfway where it is appropriate. If the buyer needs extra-urgent delivery, implement it. A person is dissatisfied with a purchase (for objective reasons) - offer a refund, replacement or small compensation at your discretion.

People appreciate not only a professional, but also a human approach. Which ultimately has a positive effect on profitability of sales.

We sell related products. Standard situation: a manager at a hardware store, after purchasing a laptop, offers to take a spray to clean the monitor. A trifle, and one that you were unlikely to initially intend to buy. Nevertheless, many agree. And all because this little thing will really be useful for them. Analyze which items from your assortment can go with the main product and offer them to the buyer. In online stores, this technique is usually used by the block “Buy with this product.”

P.S. This method is also suitable for b2b sales. Here, your main task will be to convey to your partner that the additional product will give more sales to his company first of all. As an argument, you can use example statistics on other partners.

In the system of enterprise performance indicators, the most important place belongs to profitability.

Profitability represents a use of funds in which the organization not only covers its costs with income, but also makes a profit.

Profitability, i.e. enterprise profitability, can be assessed using both absolute and relative indicators. Absolute indicators express profit and are measured in monetary terms, i.e. in rubles. Relative indicators characterize profitability and are measured as percentages or as coefficients. Profitability indicators are much less influenced than by profit levels, since they are expressed by different ratios of profit and advanced funds(capital), or profits and expenses incurred(costs).

When analyzing, the calculated profitability indicators should be compared with the planned ones, with the corresponding indicators of previous periods, as well as with data from other organizations.

Return on assets

The most important indicator here is return on assets (otherwise known as return on property). This indicator can be determined using the following formula:

Return on assets- this is the profit remaining at the disposal of the enterprise, divided by the average amount of assets; multiply the result by 100%.

Return on assets = (net profit / average annual assets) * 100%

This indicator characterizes the profit received by the enterprise from each ruble, advanced for the formation of assets. Return on assets expresses a measure of profitability in a given period. Let us illustrate the procedure for studying the return on assets indicator according to the data of the analyzed organization.

As can be seen from the table, the actual level of return on assets exceeded the planned level by 0.16 points. This was directly influenced by two factors:

• above-plan increase in net profit in the amount of 124 thousand rubles. increased the level of return on assets by: 124 / 21620 * 100% = + 0.57 points;
• an above-plan increase in the enterprise's assets in the amount of 993 thousand rubles. decreased the level of return on assets by: + 0.16 - (+ 0.57) = - 0.41 points.

The total influence of two factors (balance of factors) is: +0.57+(-0.41) =+0.16.

So, the increase in the level of return on assets compared to the plan took place solely due to an increase in the amount of net profit of the enterprise. At the same time, the increase in average cost, others, also reduced the level return on assets.

For analytical purposes, in addition to indicators of profitability of the entire set of assets, indicators of profitability of fixed assets (funds) and profitability of working capital (assets) are also determined.

Let us present the profitability indicator of fixed production assets (otherwise called the capital profitability indicator) in the form of the following formula:

The profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average cost of fixed assets.

Profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average value of current assets.

Return on Investment

The return on invested capital (return on investment) indicator expresses the efficiency of using funds invested in the development of a given organization. Return on investment is expressed by the following formula:

Profit (before income tax) 100% divided by the currency (total) of the balance sheet minus the amount of short-term liabilities (total of the fifth section of the balance sheet liabilities).

Return on equity

In order to obtain an increase through the use of a loan, it is necessary that the return on assets minus interest on the use of a loan is greater than zero. In this situation, the economic effect obtained as a result of using the loan will exceed the costs of attracting borrowed sources of funds, that is, interest on the loan.

There is also such a thing as financial leverage, which is the specific weight (share) of borrowed sources of funds in the total amount of financial sources for the formation of the organization’s property.

The ratio of the sources of formation of the organization's assets will be optimal if it provides the maximum increase in return on equity capital in combination with an acceptable amount of financial risk.

In some cases, it is advisable for an enterprise to obtain loans even in conditions where there is a sufficient amount of equity capital, since the return on equity capital increases due to the fact that the effect of investing additional funds can be significantly higher than the interest rate for using a loan.

The creditors of this enterprise, as well as its owners (shareholders), expect to receive certain amounts of income from the provision of funds to this enterprise. From the point of view of creditors, the profitability (price) indicator of borrowed funds will be expressed by the following formula:

The fee for using borrowed funds (this is the profit for lenders) multiplied by 100% divided by the amount of long-term and short-term borrowed funds.

Return on total capital investment

A general indicator expressing the efficiency of using the total amount of capital available to the enterprise is return on total capital investment.

This indicator can be determined by the formula:

Expenses associated with attracting borrowed funds plus profit remaining at the disposal of the enterprise multiplied by 100% divided by the amount of total capital used (balance sheet currency).

Product profitability

Product profitability (profitability of production activities) can be expressed by the formula:

The profit remaining at the disposal of the enterprise multiplied by 100% divided by the total cost of products sold.

The numerator of this formula can also use the profit indicator from sales of products. This formula shows how much profit an enterprise has from each ruble spent on the production and sale of products. This profitability indicator can be determined both for the organization as a whole and for its individual divisions, as well as for individual types of products.

In some cases, product profitability can be calculated as the ratio of the profit remaining at the disposal of the enterprise (profit from product sales) to the amount of revenue from product sales.

• from changes in the structure of sold products. An increase in the share of more profitable types of products in the total amount of production helps to increase the level of profitability of products.;
• changes in product costs have an inverse effect on the level of product profitability;
• change in the average level of selling prices. This factor has a direct impact on the level of profitability of products.

Return on sales

One of the most common profitability indicators is return on sales. This indicator is determined by the following formula:

Profit from sales of products (works, services) multiplied by 100% divided by revenue from sales of products (works, services).

Return on sales characterizes the share of profit in revenue from product sales. This indicator is also called the rate of profitability.

If the profitability of sales tends to decrease, then this indicates a decrease in the competitiveness of the product in the market, as it indicates a reduction in demand for the product.

Let's consider the procedure for factor analysis of the return on sales indicator. Assuming that the product structure remains unchanged, we will determine the impact on the profitability of sales of two factors:

• changes in product prices;
• change in product costs.

Let us denote the profitability of sales of the base and reporting period, respectively, as and .

Then we obtain the following formulas expressing the profitability of sales:

Having presented profit as the difference between revenue from sales of products and its cost, we obtained the same formulas in a transformed form:

Legend:

∆K— change (increment) in profitability of sales for the analyzed period.

Using the method (method) of chain substitutions, we will determine in a generalized form the influence of the first factor - changes in product prices - on the return on sales indicator.

Then we will calculate the impact on the profitability of sales of the second factor - changes in product costs.

Where ∆K N— change in profitability due to changes in product prices;

∆K S— change in profitability due to changes in . The total influence of two factors (balance of factors) is equal to the change in profitability compared to its base value:

∆К = ∆К N + ∆К S,

So, increasing the profitability of sales is achieved by increasing prices for products sold, as well as reducing the cost of products sold. If the share of more profitable types of products in the structure of products sold increases, then this circumstance also increases the level of profitability of sales.

In order to increase the level of profitability of sales, the organization must focus on changes in market conditions, monitor changes in product prices, constantly monitor the level of costs for production and sales of products, as well as implement a flexible and reasonable assortment policy in the field of production and sales of products.

Profitability refers to various relative values ​​that determine the effectiveness of business activities. The return on sales ratio shows how capable the company's specialists are of controlling costs and implementing pricing policies.

The coefficient can be calculated not only for a traditional enterprise, but also for a huge corporation with many divisions or industries. The value will depend on the industry, the rate of turnover of funds and the capital structure (weight of borrowed funds). Economic theory offers various options for calculating this indicator.

Formulas for calculating the profitability of product sales

This ratio shows the share of profit in each ruble of revenue. The value depends on the industry, the size of the enterprise and the duration of the production cycle.

Traditional sales profitability formula:

• K = profit from sales/revenue excluding VAT and excise tax*100%

For calculations, you can use the values ​​of gross, operating and net profit.

• gross ( VP) = revenue (price*sales volume) minus the full cost of production or purchase of goods;
• operating room ( OP) = VP minus operating (current) expenses;
• clean ( Emergency) – OP excluding taxes.

Formula for profitability of sales based on gross profit:

• VP/revenue*100%.

The result is the amount of gross profit in revenue.

Operating profit value:

• OP/revenue*100%

The result is the amount of operating profit in revenue.

Formula for calculating return on sales based on net profit (after tax):

• PE/revenue*100%

This ratio is important for enterprises with a small amount of equity capital and fixed assets. For the reliability of the analysis, it must be calculated over several periods. The coefficient can also be calculated for individual product groups.

In theory, there is also the concept of minimum profitability, which is equal to the average interest rate of a bank deposit. In practice, the minimum indicator depends on the scale of the enterprise. A large supermarket will survive with an indicator of 3-5%, and a mini-bakery will go bankrupt even with 15%. That is, the situation at an enterprise is not always determined by relative indicators. But the statement is always invariably true: “An increase in the sales profitability ratio is good, a decrease is bad.”

Reasons for the decline in indicators and ways to improve them

Coefficients decrease if prices decrease, assortment changes, and costs increase. Regardless of the reason, a decrease indicates an unfavorable situation. To identify the reasons, an analysis of costs, pricing principles, and assortment is carried out.

If the decrease is caused by a reduction in sales volumes, then there can be only 2 options: decreased demand or unsatisfactory performance of the marketing department. Constant calculation of indicators allows you to quickly navigate the situation, find the reasons for the decline and eliminate them.

But it’s not enough to know how to find return on sales—the formula won’t change anything. It is important to know how to improve your performance. There can be several ways:

• cost reduction;
• cost reduction;
• increase in prices for certain groups of goods.

The first method is used most often. This may include staff reduction and reduction in operating costs. The second method interacts with the first. For example, when staffing is reduced, production costs automatically decrease. A less common method is to expand the enterprise in order to reduce the cost per unit of goods.

The third method is the most risky. Implementation requires caution, accurate calculations and expansion of the range. You can increase the price without the risk of losing regular customers for groups of goods that are purchased at almost any price. Another option is to expand the range with very expensive but elite products.

The role of the profitability ratio of product sales in the analysis of economic activity

If the values ​​of the coefficients are calculated for several periods in a row, their comparison makes it possible to determine how competently decisions are made and how efficiently resources are used. It is advisable to begin the analysis of indicators with a comparison with values ​​for previous periods and industry averages.

It is also important to take into account that the calculation results will not be correct if the enterprise’s profit has a large share of income from other activities. This means that when calculating, you only need to take into account the profit from sales. Another nuance is the amount of borrowed funds. It is also necessary to deduct interest paid on loans from net profit.

In the process of analyzing business activities, the indicator of product profitability is widely used. This indicator is determined by the ratio of profit from sales or net profit from core activities to the amount of costs for products sold. The profitability of a particular type of product is determined by the ratio of profit from the production (sales) of this product to the total cost of this type of product.

Product profitability characterizes how much profit or self-financing income a business entity has from each ruble spent on the production and sale of products.

Formulas for calculating product profitability:

1. Profitability of all products sold:

R=,R=
,

where R is the profitability of products sold, %;

P – profit from sales, rub.;

Z – costs of production and sales of products, rub.;

PE – net profit from core activities, rub.

2. Profitability of certain types of products:

R ISD =
,

where R IZD is the profitability of a particular type of product, %;

Сi – cost price of the i-th type of product, rub.

Return on sales

Sales profitability is one of the most important indicators of a company's performance. The indicator is calculated as the ratio of profit from the sale of products (works, services) or net profit to the cost of products sold (the amount of revenue received).

This coefficient shows how much profit from sales the enterprise receives from each ruble of products sold. In other words, how much remains with the enterprise after covering the cost of production. If the result is expressed not as a percentage, but in kopecks, then it will show how many kopecks of profit from sales are received from each ruble of revenue from the sale of products.

Formulas for calculating profitability of sales:

1. Profitability of sales for the enterprise as a whole:

R PR =
, R PR =
,

where R PR is the profitability of sales for the enterprise as a whole, %;

P PR – profit from sales, rub.;

In PR – sales revenue (including indirect taxes or without indirect taxes), rub.;

PE – net profit, rub.

2. Profitability of sales of certain types of products:

R PRizd =
,

where R PRizd is the profitability of sales of certain types of products, %;

Цi – price of the i-th type of product, rub.;

Сi – cost price of the i-th type of product, rub.

The return on sales indicator characterizes the most important aspect of the company's activities - the sale of main products, and also evaluates the share of cost in sales. This indicator reflects only the operating activities of the enterprise. It has nothing to do with financial activities.

Return on assets

Return on assets is a comprehensive indicator that allows you to evaluate the results of the core activities of an enterprise. It expresses the return that accrues per ruble of the company's assets.

Return on assets is determined using the following formulas:

,
,

where R A – return on assets, %;

A – average value of assets for the period, rub.

This ratio shows the efficiency of asset management of an organization through the return on every ruble invested in assets and characterizes the generation of income by a given company. This indicator is also another characteristic of resource productivity, but not through sales volume, but through profit before tax.

Any entrepreneur carries out commercial activities with the aim of obtaining benefits in the form of a stable high income.

Negative financial indicators, as well as breaking even, signal the need to make changes in the production process or promotion of goods (services).

It is impossible to understand in what part the strategy of the company’s operation and development should be reformatted without a detailed analysis of the results of operating activities.

A significant indicator reflecting the correctness of pricing and, as a result, the effectiveness of sales of products (services), is the profitability of sales.

The essence of the concept

The productivity of a company is determined by the timing of achieving its goals.

In addition, it is important how effectively the investment is converted into cash savings.

The transformation of the cost part into a profitable one for business owners is a more clear result, because these indicators are easy to compare and contrast across reporting periods.

The calculation of return on sales (ROS) allows you to reflect the compliance of tactical actions with the strategic goals of the company, which determines the efficiency of resource use.

The indicator characterizes the quality of sales of products (services) and allows us to estimate the share of expenses in total sales.

In other words, return on sales shows the rate of profit, that is, the share of profit from activities in total revenue.

The calculation of RP is carried out for the purpose of:

• profit control;
• determining sales efficiency (profitability and loss ratio by category);
• tracking business development dynamics;
• comparison of the company's results with similar results of competitors.

Formula calculation

The return on sales ratio demonstrates how much profit the company received from each monetary unit earned as a result of the sale of its products.

The indicator is calculated as the ratio of net profit (after tax) to sales volume for a specified period in monetary terms.

The formula that calculates the level of profitability of sales shows how much money will remain on the company’s balance sheet after:

• payment of credit interest on current loans;
• tax deductions;
• covering expenses spent on the cost of manufactured products.

That is, the indicator characterizes the share of product costs in sales.

It is worth noting that using the calculation of RP, it is impossible to see the effect of investments predicted for the long term.

After all, the RP is calculated by the values ​​of the total values ​​for a specific period (usually a reporting period).

For example, a company wants to expand the range of products produced, and for this it uses new technologies. Accordingly, this entails certain costs.

Attracting additional investments may reduce the level of RP. In such cases, a decrease in the indicator is not considered a sign of ineffectiveness of the enterprise.

How to calculate

In most cases, the indicator is calculated using the classic method - margin. That is, the return on sales (Gross Profit Margin) reflects the percentage ratio of marginal income to the revenue received by the company.

GPM = (revenue from sales of products (services) minus time costs / revenue from sales) x 100%

It is worth noting that at different enterprises the RP values ​​are determined by differences in product lines and features of competitive strategies.

Even if the values ​​of certain indicators (operating costs, revenue, profit before tax) are the same for 2 companies, the RP can vary significantly. This is due to the impact of interest payments on net profit.

Return on sales on balance sheet

This coefficient demonstrates how much profit the company received from each monetary unit earned as a result of the sale of its products. The indicator is calculated as the ratio of net profit (after tax) to sales volume for a specified period in monetary terms.

RPb = net profit / revenue

RP on the balance sheet, if necessary, is calculated as a total value based on the results of the company’s activities or for specific product items. Data is taken from financial statements - f. No. 2:

RPb = (p. 2200 / p. 2110) x 100%

RPb = (p. 050 / p. 010) x 100%

Coefficient

The RP (Return on Sales) coefficient should not have a negative value. Of course, it is correlated based on the industry in which the company operates, but the level of current inflation must be taken into account. The KRP is calculated as follows:

KRP (ROS) = net profit in monetary terms ( NI ) / net sales or revenue (NS)

What is the difference between net profit and revenue? NS (Net Sales) represents funds in full from the sale of products.

The costs of its acquisition are not taken into account.

The quantity is always positive. NI (Net Income) takes into account all costs, representing the same NS remaining after deducting taxes and payments (rent, salaries, etc.).

NI can be characterized by a positive and negative value.

In some cases, RP is calculated as the ratio of gross (operating) profit (Gross Profit) to net sales volume minus VAT:

ROS = GP/NS

By correctly calculating and analyzing the results of the obtained indicators for the reporting periods, you can take actions to increase profitability. This will affect the productivity of the company.

Profitability ≠ markup

Many novice entrepreneurs confuse profitability with trade margins. It's a delusion!

It is fundamentally wrong to identify these concepts.

Let's look at the difference using an example:

The cost of one unit of production produced by the company is $10. The trade markup on it is $5. Thus, the selling price of the product for the consumer is $15.

Having sold 100 units of goods within a month, the company will receive revenue in the amount of $1.5 thousand. At the same time, the level of monthly expenses of the enterprise is higher – $2 thousand. In this case, we are not talking about profit, because the indicator is characterized by a negative value (-$500). The entrepreneur will simply go into the red.

From this it becomes clear that profitability of sales and trade margins are interrelated, but not interchangeable.

How it works

Let's calculate the RP for 2014. For example, revenue from total sales of a company is $1.25 million, net profit is $300 thousand. For 2013, revenue was $1.14 million, net profit was $270 thousand.

ROS 2014 = 300 / 1250 = 0.24 x 100% = 24%

ROS 2013 = 270 / 1140 = 0.236 x 100% = 23.6%

Δ ROS = ROS 2014 – ROS 2013 = 24% – 23.6% = 0.4%.

Thus, over the year, the sales price increased by 0.4%, which indicates correct pricing and effective work of the sales department of a particular enterprise.

A decrease in RP, in turn, is a reason to analyze the causes and, accordingly, search for ways to optimize the business.

It’s worth starting with calculating the RP for individual clients, territorial sales segmentation, and product groups.

Perhaps the solution to the problem lies on the surface. You just need to work out the customer base or reconsider the demand for the range of products (services) produced.

It is worth noting that the RP indicator is influenced by various factors (in addition to the performance of the enterprise), so a decrease in profitability does not always indicate an ineffective marketing policy or poor quality work of “sales people”.

The ability to calculate such nuances and predict the situation is a skill that is the key to the stable and successful functioning of any business.

How to increase your sales profitability

Every manager dreams of achieving such indicators, one glance at which would be enough to understand that the business is successful and stable.

How to achieve good sales? The level of profitability of sales is determined by various factors.

For example, a downward trend can be triggered by an increase in production costs, an increase in prices, or a drop in consumer demand.

In the first case, the competitiveness of the enterprise decreases. It can be recommended to study the cost structure in order to identify the reasons for their increase.

It is necessary to determine in the cost structure the cost items that can realistically be reduced without reducing production rates.

At the same time, it is appropriate to monitor existing competitors and their activities in order to operate on pricing without losing the number of buyers for whom your products (services) are in demand .

If the result of a decrease in profitability is a drop in sales volumes, it is necessary to check the quality of the products. It is also advisable to work out a marketing strategy:

• monitor price fluctuations in your segment;
• respond in a timely manner to changes in market conditions;
• control the level of cost of products (services);
• implement a flexible assortment policy.

When producing several types of products, an enterprise should find out the “leader” of consumer demand. By increasing the share of products with the highest profitability in the structure of products produced for sale, it will be possible to increase the total profitability of sales.

Controlling the consistency of expenses and income, having a clear understanding of net revenue, is one of the basic rules for successful business activities.

Calculation of return on sales shows a clear result of business profitability, which makes it possible to timely correct tactical and strategic actions.