Profitability of sales on net profit - formula. How to calculate return on sales: what is it and how is Ros standard value derived
Profitability is called various relative values that determine the effectiveness of entrepreneurial activity. The sales profitability ratio shows how the company's specialists are able to control costs and implement pricing policy.
You can calculate the coefficient not only for a traditional enterprise, but also for a huge corporation with many divisions or industries. The value will depend on the industry, turnover rate and capital structure (leverage). Economic theory offers various options for calculating this indicator.
Formulas for calculating the profitability of sales of products
This ratio shows the share of profit in each ruble of revenue. The value depends on the industry, the scale of the enterprise and the duration of the production cycle.
The traditional formula for the profitability of sales:
- K = profit from sales / revenue without VAT and excise * 100%
For calculations, you can use the values of gross, operating and net profit.
- gross ( VP) \u003d revenue (price * sales volume) minus the full cost of production or purchase of goods;
- operating room ( OP) = VP minus operating (current) expenses;
- clean ( state of emergency) – OP net of taxes.
The formula for the profitability of sales by 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.
The formula for calculating the profitability of sales based on net profit (after tax):
- NP/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 for 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 figure depends on the scale of the enterprise. A large supermarket will survive at 3-5%, and a mini-bakery will go bankrupt at 15%. That is, the situation at the enterprise is not always determined by relative indicators. But the statement is always true: “Increasing the sales profitability ratio is good, decreasing is bad.”
Reasons for the decrease in indicators and ways to increase them
Coefficients decrease if prices decrease, assortment changes, costs increase. Regardless of the cause, 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 decrease in sales volumes, then there can be only 2 options: decrease in demand or unsatisfactory performance of the marketing department. The constant calculation of indicators allows you to quickly navigate the situation, find the reasons for the decline and eliminate them.
But it is not enough to know how to find the return on sales - the formula will not change anything. It is important to know how to improve 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 be a reduction in staff and a reduction in operating costs. The second way interacts with the first. For example, with a reduction in staff, the cost is automatically reduced. A less common way is to expand the enterprise in order to reduce the cost per unit of goods.
The third way 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 bought at almost any price. Another option is to expand the range of very expensive, but elite products.
The role of the profitability ratio of the sale of goods 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 start the analysis of indicators with a comparison with the values for previous periods and the average indicators of the industry.
It is also important to take into account that the calculation results will not be correct if the profit of the enterprise has a large share of income from other activities. This means that only profit from sales should be taken into account in the calculations. Another nuance is the amount of borrowed funds. Interest paid on loans must also be deducted from net income.
The main criterion for the success of a business is the final financial indicators, which consist in the profitability of activities. There are several options for calculating the effectiveness of economic relations, one of which is the calculation of the profitability of sales by net profit. The formula for this method is given below.
Net profit
All Russian enterprises involved in economic life are created to generate income.
The main criterion for evaluating the effectiveness of activities is the indicator of the net profit of the enterprise.
This value is subject to mandatory reflection in the book. balance sheet of the company (clause 23 PBU 4/99).
In addition, the Ministry of Finance of the Russian Federation, by Order No. 66n dated July 2, 2010, approved the official forms of the balance sheet and income statement.
According to the above act, the indicators of the net profit of the enterprise are reflected in line 2400 of the income statement.
You can get the desired value of the organization's efficiency by subtracting section 2410 information from the indicators on line 2300.
In addition to this method, the company's net profit can be obtained by excluding from gross revenue:
- full cost;
- taxes, contributions and compulsory payments.
Also, income and expenses from non-core activities of the entity take part in this calculation.
The net profit of the enterprise remains the property of the company and can be spent at the discretion of the beneficiaries of the company for the following purposes:
- payment of income to business owners;
- use of profits to increase the working capital of the company;
- organization development;
- other needs at the discretion of the owners of the subject of economic relations.
It should also be taken into account that net profit can be used to calculate the profitability of sales.
Return on sales based on net profit
It should be noted that the calculation of the profitability of the enterprise as a whole, as well as the effectiveness of sales, is not a prerequisite for the correct maintenance and preparation of financial statements.
However, this value is required for:
- correct assessment of the profitability of the enterprise;
- clarification of the share in profits from various sales;
- determining the dynamics of proceeds from sales;
- timely correction of business tactics and strategy.
Currently, the formula for return on sales based on net income is as follows:
RP = PE / BP, where:
- RP - profitability of sales;
- PE - net profit;
- VR - revenue.
As mentioned above, the value of net profit is contained in line 2400 of the statement of financial results, which is filled in by the enterprise without fail.
The revenue indicator is reflected in the same document, but in line 2110.
It should be especially noted that the official form for calculating the return on sales by net profit, as well as by other indicators, has not been developed at the legislative level. Accordingly, business efficiency can be calculated using other values, for example:
- gross profit;
- profitability before tax.
All of the above figures are also included in the income statement.
In conclusion, it should be noted that there are no normative indicators of profitability in the provisions of domestic legislation. Accordingly, each subject of economic legal relations should determine the acceptability of the level of efficiency of their business, taking into account the specific features of its implementation.
Profitability is an economic indicator that shows the degree of efficiency in the use of any type of resources (material, natural, labor, capital, investment, sales, etc.). In other words, profitability is the profitability of a business, its economic efficiency and benefits.
Accordingly, if the profitability indicators are negative, then it is unprofitable to conduct business and it is necessary to work on indicators of increasing profitability, find out the reasons for low profitability and look for ways to solve them. Profitability, its level is expressed in coefficients, and relative indicators are expressed as a percentage.
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Also, profitability shows the effectiveness of the use of certain funds, when the company not only compensates for all costs, but also makes a profit.
There is such a thing as the profitability threshold - this is an indicator (point) that actually separates the periods of unprofitable production and the effective operation of the company (compare it with the breakeven point).
To analyze the efficiency of the enterprise, the actual profitability indicators are compared with the planned ones, with the data of past periods and similar economic data of other companies. The ratio of total income to the main flows or assets - these will be the indices (ratios) of profitability.
The main standards for profitability can be divided into the following main groups:
- profitability of sales (profitability of sales);
- return on assets (profitability of non-current assets);
- return on investment;
- return on current assets;
- return on equity;
- product profitability;
- income from the efficient use of production assets;
The overall profitability of the company and is determined by these main indicators, depending on the scope of its activities. Assets and their profitability equals the efficiency of using equity or invested funds, how assets make a profit and in what quantity, depending on the resources expended. Return on assets is calculated as the ratio of profit for a certain period to the amount of assets for the same period.
Formula:
Return on assets, R act. \u003d P (profit) / A (size of assets)
According to the same parameters, economists calculate the profitability of using production assets, investment capital, and own fixed capital. For example, the return on equity shows how effective shareholders' investments in the business are.
Profitability of sales and formulas for its calculation
Profitability of sales (profitability of sold products) is an indicator of profitability, expressed in coefficients and displays income (its share) for each spent monetary unit. Return on sales is calculated as the ratio of net profit to total revenue.
Formula:
Return on sales, R prod. = P (net income) / V (revenue).
Profitability of sales directly depends on the pricing policy of the company, its flexibility according to market conditions in a particular segment. Some firms apply their external and internal strategies, study competitors' markets, product ranges and their lines to obtain high profitability from sales.
There are no clear norms and values to indicate the profitability of the sale, since the normative value and their indicators depend on the specifics of the company's activities. Return on sales measures show the overall performance of operations over a specific period.
Basic formulas for calculating profitability of sales
For effective sales management and control of the company's performance, sales profitability is calculated according to the following indicators:
- by gross profit;
- operating profit EBIT;
- according to the balance sheet;
- net return on sales;
The profitability of sales by gross profit is an indicator (coefficient) of profitability, which means the share of profit on each earned monetary unit. This indicator is calculated as the ratio of net income (after paying all taxes) to the total amount of cash for the same period of the enterprise's operating activities.
The formula will be:
Operating profitability = Gross income / Trading revenue.
Gross profit organization is also displayed in the accounting data. Operating profit margin EBIT is the ratio of EBIT to total revenue. EBIT is total income before all taxes and interest.
The formula for calculating this indicator:
Return on sales from operating income EBIT = Total revenue (before taxes) / Total revenue
The EBIT return on sales is also referred to as the operating return on sales. This ratio is intermediate between the total return on sales and the results of the company's net income.
Return on sales by balance sheet- this is a coefficient that is calculated according to financial statements and characterizes the share of profit from sales of the company in the amount of total revenue.
Calculated using the following formula:
Balance sheet profitability = total sales revenue (or loss) / sales revenue.
Net sales return- this coefficient shows how many kopecks of net profit are in each monetary unit of revenue and is calculated as the ratio of net profit (the deduction of all taxes, cost and wage fund of personnel, other expenses) to total revenue.
Formula:
Net sales return = Net profit / Revenue
In order to independently calculate the data on net profitability from sales, it is enough to know the total number of units of products sold and income (after paying all relevant taxes and maintenance costs) that is not related to the non-operating activities of the enterprise (this can be exchange rate differences, investments, sales shares or other securities).
Analysis of results. The profitability of sales data helps a company to calculate different types of profit in the total revenue, but it also depends on the characteristics of the main activity of the enterprise.
Indicators for calculating profitability for several periods help to quickly manage the processes of economic activity of the organization, quickly respond to market fluctuations and, by various economic methods, influence the improvement of performance indicators and constant income generation.
Return on sales indicators are used to calculate operational activities; for long-term periods, this indicator is better not to be used, since the sales market is very dynamic and you need to respond to all its changes as quickly as possible.
These indicators are effective for solving daily and monthly tasks and plans for the sale of products and goods.
How to increase sales profitability
The main ways to increase the profitability of sales are as follows:
- reduction of production costs (cost reduction);
- increase in production volumes and, due to this, gross proceeds;
But the enterprise, when introducing these improvements, must have material and labor resources. Work in this direction requires the selection of highly qualified personnel, it is possible to conduct trainings among personnel according to new methods and practices that are effectively used in world economic practice.
First of all, you need to study the positions of competitors in the market, the range of products presented, pricing policy, promotions and, based on this, analyze what can affect the cost reduction of your products.
You need to compare not only offers on the market in your region, but also take into account the features and advantages of leading companies in the market. Perhaps the constant introduction of new technologies affects the low cost, then conduct a study on how profitable it is to introduce these technologies in your business and how quickly the innovations will pay for themselves.
As practice shows, despite the initial costs for the development of personnel and the introduction of new products may seem large, but having made an economic analysis, taking into account planned indicators, these costs always justify themselves.
To fully comply with market standards, you need to constantly monitor the dynamics of sales markets, customer requirements, and respond very quickly to all changes and fluctuations. Effective should be not only the price policy, but assortment. The assortment must be constantly updated and improved so that buyers see it all (people love new items and are interested in them). The quality of the products must also be appropriate.
To increase the profitability of sales, it is necessary to take into account not only economic factors and opportunities (cost reduction, profit optimization), but also an effective marketing policy. Economists in most cases recommend removing or reducing some items of expenditure to increase the profitability of sales, and marketers offer effective pricing policies.
The right combination of marketing and economic solutions guarantees a constant income from sold products, goods or services.
The main purpose of any commercial enterprise is Receiving a profit. Work for the sake of a simple increase in revenue can only suit a part of the staff who receive wages from the volume of sales.
For shareholders or founders of the enterprise, the managers hired by them, such a situation will be unacceptable. They will require the necessary changes to be made to improve the financial situation and generate a net profit.
Therefore, financial managers are constantly analyzing and looking for additional resources to increase the profitability of sales.
Profitability of sales calculated as the ratio of profit to net revenue for a certain period. This is the main indicator for assessing the effectiveness of the enterprise.
Formulas for calculation
Return on sales is calculated using various formulas that differ in the cost indicators used in the calculation.
The simplest, but not sufficiently objective indicator of the ratio of gross profit to revenue:
GRM= VP/TR,
GRM - return on sales by gross margin,
VP - gross profit,
TR - net revenue.
For revenue, the cost of sales is subtracted.
According to the Profit and Loss Statement (form No. 2), adopted in Russian legislation, to calculate the profitability of sales by gross profit, this indicator (line 2100 of the report) must be divided by the revenue indicator (line 2110 of the report).
Example. For the first quarter of 2015, the revenue of Temp LLC amounted to 100 million rubles. For the same period in 2014 - 80 million rubles. Gross profit in the first quarter of 2015 amounted to 25 million rubles, and in the first quarter of 2014 - 22 million rubles.
Return on sales in terms of gross profit for the first three months of 2015 amounted to
25 million rubles / 100 million rubles = 0.25,
and for the three months of 2014 22 million rubles / 80 million rubles = 0.275.
The results of the calculation indicate that with an absolute increase in gross profit by 3 million rubles (25-22) in the first quarter of 2015 compared to the same period last year, the gross profit margin decreased by 0.025 (0.25-0.275).
The indicator of profitability of sales in terms of gross profit is not an objective characteristic of the enterprise's activities for the reason that it does not include other costs in the calculation, without which it is impossible to do: business expenses(line 2210 of the report) andmanagement expenses(line 2220 of the report).
According to the profitability of sales in terms of gross profit, one can assess how successfully the services directly related to the purchase of goods, raw materials, materials and their sale worked.
The profitability ratio of sales by gross profit reflects the average level of the total amount of markups, allowances and discounts for the reporting period.
For a more accurate assessment of the effectiveness of the enterprise, the formula for return on sales is more often used:
RP = Profit from sales (line 2200 of the report) / revenue (line 2110 of the report).
When calculating profits using this formula, management and commercial expenses are already taken into account, therefore, for many enterprises, the RP coefficient will reflect the real state of affairs.
Continuation of the example. In the first quarter of 2015, commercial expenses of Temp LLC amounted to 4 million rubles, management expenses - 2 million rubles. Last year, for the first three months, commercial expenses amounted to 3.5 million rubles, management expenses - 1.5 million rubles.
Sales profit for the first quarter of 2015 amounted to 19 million rubles, in the first quarter of 2014 - 17 million rubles.
Return on sales for the first three months of 2015 amounted to:
19 million rubles / 100 million rubles = 0.19;
and for the three months of 2015 17 million rubles / 80 million rubles = 0.2125.
With an absolute increase in profit by 2 million rubles, the profitability of sales decreased by 0.0225
In international practice, it is customary to calculate profitability on profit before deducting interest, taxes and (EBITDA):
EBITDA margin = EBITDA / Sales revenue
However, to obtain an absolutely complete picture of the financial and economic activities of the enterprise, it is necessary to take into account other income and expenses incurred in the reporting period:
- income from investments in other enterprises, organizations;
- received interest on investments;
- other income;
- interest expenses on commercial credits and other borrowings;
- payment of current income tax;
- other expenses;
The formula for return on sales by net profit
is the final assessment and analysis of the enterprise.
Additional formulas for investors
Participants or shareholders of the enterprise are primarily interested in the question of how much they will receive return on invested capital. For their needs and convenience, indicators are also calculated return on total capital according to the formula.
All sales are carried out to achieve the same goal - financial profit. But it is impossible to give an objective assessment of the effectiveness of sales without an indicator of their profitability.
What is profitability?
Profitability of sales, also known as the profitability ratio of sales, is a percentage of the share of profit from each ruble earned. In other words, return on sales is the ratio of net income to the amount of proceeds from the sale of products, multiplied by one hundred percent.
Some entrepreneurs are deluded into thinking that return on sales represents the return on investment. It is not right. The profitability ratio of sales allows you to determine what amount of money in the volume of products sold is the profit of the enterprise minus tax and related payments.
This profitability indicator shows the profitability solely from the sales process itself. I.e how much the cost of the goods pays for the costs of the production process of the goods/services (purchase of the necessary components, use of energy and human resources, etc.).
When calculating the coefficient, such an indicator as the amount of capital (volume of working capital) is not taken into account. Thanks to this, you can safely analyze the profitability of sales of competing enterprises in your segment.
What does ROI show an entrepreneur?
- The profitability ratio of sales allows you to characterize the most important thing for a company or enterprise - the sale of the main products . In addition, the share of the cost in the sales process is estimated.
- Knowing the profitability of sales, the company can control pricing and costs . It is worth noting that different companies produce goods using different strategies and techniques, which causes different profitability ratios. But even if revenue, operating costs, and pre-tax earnings are equal for two companies, their return on sales will be different. This is due to the direct impact of the amount of interest payments on the total amount of net profit.
- Return on sales is not a reflection of the planned effect of long-term investments . The bottom line is that if the company decides to change the technological scheme or purchase innovative equipment, then this coefficient may slightly decrease. But he will regain his position and surpass them if the modernization strategy was chosen correctly. By the way, if you want to improve the profitability indicator, read the article "increasing the profitability of sales".
How to calculate return on sales?
To calculate the profitability ratio of sales, the following formula is used:
ROS- the English abbreviation Return on Sales, which in translation into Russian actually means the desired profitability ratio, presented as a percentage;
N.I.- English abbreviation Net Income, net profit indicator, expressed in monetary terms;
NS- English abbreviation Net Sales, the amount of profit received from the sale of manufactured products, expressed in monetary terms.
Correct initial data and a dry calculation will allow you to derive the real profitability of sales. The formula for profitability of sales is simple - the result obtained is an indicator of production efficiency.
An illustrative example of calculating profitability:
Unfortunately, the general formula for return on sales can only show the efficiency or inefficiency of the company, but does not give an answer about the problem areas of the business.
Suppose, after analyzing the profitability data for 2 years, the company received the following figures:
In 2011, the company received a profit of 2.24 million dollars, in 2012 this figure increased to 2.62 million dollars. Net profit in 2011 was 494 thousand dollars, and in 2012 - 516 thousand dollars. What changes has undergone sales profitability in 2012?
The profitability ratio for 2011 is equal to:
ROS2011 = 594 / 2240 = 0.2205 or 22%.
The profitability ratio for 2012 is equal to:
ROS2012 = 516 / 2620 = 0.1947 or 19.5%.
Let's calculate the final change in sales profitability:
ROS = ROS2012 - ROS2011 = 22 - 19.5 = -2.5%.
In 2012, the profitability of sales of the enterprise decreased by 2.5%.
Here you can see that profitability decreased by 2.5% over 2 years, but the reasons are not clear until a more detailed analysis is made. It includes:
- Examine the change in tax costs and deductions that are required to calculate in NI.
- Calculation of the profitability of a product / service. Formula:
Profitability \u003d (revenue - cost * - costs) / revenue * 100%
- The profitability of each sales manager. Formula:
Profitability \u003d (revenue - salary * - taxes) / revenue * 100%.
- Advertising profitability of goods/services. Formula:
*If you provide services, then the cost includes: organization of a workplace for sales managers (computer equipment, rent of sq.m., telephone equipment, utility payments proportional to a person, etc.), their salary, expenses for paying for a telephone, advertising, costs for the necessary software (CRM, 1C, etc.), payments for a virtual PBX.
We note right away that it is possible to use a simpler formula for the return on sales: ROS = GP (gross profit) / NS (total revenue). But it is more appropriate for calculating “narrow” indicators (profitability for each manager, for a specific product, for a page on a website, etc.).
It is important to note that each manager can have a different sales structure: someone sells only expensive and rarely, someone small, but often - this will be the main difficulty in calculating the net profit (margin after taxes). It is necessary to resort to the margin data of each product for each seller using CRM.
- Calculation of sales volumes and margins. Perhaps the profitability has fallen because. the most marginal goods ceased to be on sale.
| Site sale | Sale of contextual advertising | |
|---|---|---|
| Profitability by formula | (500K - 135K - 90K for taxes)/500K = 55% | (900k - 600k - 162k for taxes)/900k = 15% |
| Sales volume per month | 500 thousand rubles (cost of 5 sites) | 900 thousand rubles (cost of 3 projects) |
| Material costs | 15 thousand rubles (buying a domain, paying for software, advertising, etc.) | 600 thousand rubles (money given to advertising services, etc.) |
| Labor costs | 120 thousand rubles. (salary for at least 3 employees) | 40 thousand rubles. (salary for 1 employee) |
We said above that part of increasing the profitability of sales is to reduce costs and expenses. But, at the same time, we recommend that you be careful with this item. negative consequences may follow in the form of a deterioration in the quality of goods (services), a decrease in the efficiency of specialists. To avoid this, it is necessary to approach the issue of increasing the profitability of sales comprehensively! It includes a study: The table shows that, despite the fact that contextual advertising brought more money to the company's current account, its profitability is 3.7 times lower. This means that if managers start selling sites poorly, but contextual advertising is good, then a decrease in profitability cannot be avoided.
- competitors
- Sales and cost structures
- Sales channels
- CRM usage
- Manager effectiveness
After studying all this, you can proceed to the development of tactics and sales strategies. And only now to make operational decisions.
The completed data shows that it is possible to increase the costs per page of offices. they provide the highest return on business.
Calculating profitability for all layers is a rather laborious task, especially if you have not done this before, and you need an analysis for several months or even years (more than one week). And still, in the end, you can get an answer to the question “where are the strongest and weakest points”, but not understand what and how to do next. Therefore, we offer you our assistance in collecting, analyzing, recommending, executing and monitoring the optimization of the sales team to increase the profitability of the business.