Return on sales based on net profit - formula. How to calculate return on sales: what is it and how is the Ros standard value derived?
Profitability refers to the various relative values that determine efficiency entrepreneurial activity. 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 coefficient shows specific gravity profit in every 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 small volumes equity 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. Increase the price without the risk of losing regular customers It is possible 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.
The main criterion for business success is the final financial indicators, consisting in the profitability of the activity. There are several options for calculating the effectiveness of business relations, one of which is calculating the return on sales based on net profit. The formula for this method is given below.
Net profit
All Russian enterprises, taking part in economic life, are created to generate income.
The main criterion for assessing the efficiency of activity is the net profit of the enterprise.
This value is subject to mandatory reflection in the accounting records. the company's balance sheet (clause 23 of 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 financial statements financial results.
According to the above-mentioned act, the enterprise’s net profit indicators are reflected in line 2400 of the financial results statement.
You can obtain the desired value of the organization’s efficiency by subtracting the information in section 2410 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 obligatory payments.
Also included in this calculation are income and expenses from the non-core activities of the entity.
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;
- direction of profit to increase working capital companies;
- organization development;
- other needs at the discretion of the owners of the subject of economic relations.
It is also necessary to take into account that the return on sales can be calculated using net profit.
Return on sales based on net profit
It should be noted that calculating the profitability of the enterprise as a whole, as well as sales efficiency, is not prerequisite for proper maintenance and preparation of financial statements.
However, this value is necessary for:
- correct assessment of the profitability of the enterprise;
- determining the share of profits from various sales;
- determining the dynamics of sales revenues;
- timely correction of business tactics and strategy.
Currently, the formula for return on sales based on net profit looks like in the following way:
RP = PE / VR, where:
- RP - return on sales;
- PE - net profit;
- VR - revenue.
As mentioned above, the value of net profit is contained in line 2400 of the financial results statement, which is mandatory to be filled out by the enterprise.
The revenue indicator is reflected in the same document, but in line 2110.
It should be especially noted that the official form for calculating return on sales based on net profit, as well as 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 indicators are also contained in the income statement.
In conclusion, it should be noted that the provisions of domestic legislation do not contain any standard indicators of profitability. Accordingly, each subject of economic legal relations should determine the acceptability of the level of efficiency of its business, taking into account the specific features of its implementation.
Profitability is economic indicator, which shows the degree of efficiency of using any type of resources (material, natural, labor, capital, investments, sales, etc.). In other words, profitability is the profitability of a business, its economic efficiency and benefit.
Accordingly, if profitability indicators are negative, then running a business is unprofitable and you need 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 percentages.
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Also, profitability shows the efficiency of using certain funds, when the enterprise not only compensates for all costs, but also makes a profit.
There is such a thing as a profitability threshold - this is an indicator (point) that actually separates periods of unprofitable production and efficient work company (compare it with the break-even point).
To analyze the efficiency of an enterprise, actual profitability indicators are compared with planned ones, with data from past periods and similar economic data of other companies. The ratio of total income to main flows or assets will be profitability indices (ratios).
Basic profitability standards can be divided into the following main groups:
- return on sales (return on sales);
- return on assets (return on non-current assets);
- return on investment;
- return on current assets;
- return on equity;
- product profitability;
- income from the efficient use of production assets;
The total profitability of the company is determined by these basic indicators depending on the scope of its activities. Assets and their profitability equals the efficiency of using equity capital or invested funds, how assets generate 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 size of assets for the same period.
Formula:
Return on assets, R act. = P (profit) / A (size of assets)
Using the same parameters, economists calculate the profitability of using production assets, investment capital, own fixed capital. For example, return on equity shows how effective the shareholders' investments in the business are.
Return on sales and formulas for calculating it
Return on sales (profitability products sold) is an indicator of profitability, expressed in coefficients and displays income (its share) for each monetary unit spent. 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 volume).
Sales profitability directly depends on the company's pricing policy and its flexibility according to market conditions in a particular segment. Some firms apply their external and internal strategies, study competitors' markets, product ranges and product lines to obtain high sales returns.
There are no clear standards and values for indicating the profitability of sales, since the standard value and their indicators depend on the specifics of the company’s activities. Return on sales indicators show the overall operating efficiency for a specific period.
Basic formulas for calculating return on sales
For effective management sales and monitoring the results of the company’s activities, the profitability of sales is calculated using the following indicators:
- by gross profit;
- by operating profit EBIT;
- according to balance sheet data;
- net return on sales;
Sales profitability by gross profit is an indicator (coefficient) of profitability, which denotes the share of profit on each monetary unit earned. 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 operating activity of the enterprise.
The formula will be as follows:
Operating profitability = Gross income / Trading revenue.
Gross profit organization is also reflected in the financial statements. Profitability of product sales based on operating profit EBIT is the ratio of EBIT to total revenue. EBIT is total income, excluding all taxes and interest.
The formula for calculating this indicator is:
Operating profit margin EBIT = Total income (before taxes) / Total revenue
Return on sales based on operating profit EBIT is also called operating return on sales. This ratio is intermediate between the total sales return and the company's net profit results.
Return on sales on balance sheet– this is a coefficient that is calculated according to financial statements and characterizes the share of profit from the company’s sales in total revenue.
Calculated using the following formula:
Balance sheet return on sales = total income (or loss) from sales/volume of 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 field of deduction of all taxes, cost and staff payroll, other expenses) to total revenue.
Formula:
Net sales return = Net profit/Revenue
In order to independently calculate 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), which is not related to the non-operating activities of the enterprise (this could be exchange rate differences, investments, sales shares or other securities).
Analysis of results. Return on sales data helps a company calculate different kinds profit in total revenue, but everything also depends on the characteristics of the main activity of the enterprise.
Indicators for calculating profitability over several periods help to quickly manage processes economic activity organizations, quickly respond to market fluctuations and various economic methods influence improvements in performance and ongoing income generation.
Return on sales indicators are used to calculate operational activities, long periods It is better not to use this indicator, 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 your sales profitability
The main ways to increase sales profitability are the following:
- reduction in production costs (cost reduction);
- increase in production volumes and, due to this, gross revenue;
But when introducing these improvements, the enterprise must have material and labor resources. Work in in this direction requires the selection of highly qualified personnel; it is possible to conduct training among personnel according to new methods and practices that are effectively used in global economic practice.
First of all, you need to study the position of competitors in the market, the range of products presented, pricing policy, promotions, and based on this, analyze what can affect the reduction of the cost of your products.
It is necessary to compare not only offers on the market in your region, but also take into account the features and advantages of leading companies on the market. Perhaps the low cost is influenced by the constant introduction of new technologies, then conduct research on how profitable it is to introduce these technologies in your business and at what speed the innovations will pay for themselves.
As practice shows, despite the initial costs of personnel development and the introduction of new products may seem large, but after doing an economic analysis, taking into account planned indicators, these costs are always justified.
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. Not only the pricing policy, but also the assortment policy should be effective. The assortment must be constantly updated and improved so that customers see it all (people love and are interested in new items). The quality of the product 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. In most cases, to increase the profitability of sales, economists recommend eliminating or reducing some expense items, and marketers offer effective pricing policies.
The right combination of marketing and economic solutions guarantee a constant income from sold products, goods or services.
The main goal of any commercial enterprise is Receiving a profit. Working for the sake of simply increasing revenue can only suit part of the staff receiving wages on sales volume.
For the shareholders or founders of the enterprise, and the managers they hire, this situation will be unacceptable. They will demand to make the necessary changes to improve the financial situation and generate net profit.
Therefore, financial managers conduct constant analysis and seek additional resources to increase sales profitability.
Return on sales is calculated as the ratio of profit received to net revenue for a certain period. This is the main indicator for assessing the efficiency of an 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 - gross profit margin,
VP - gross profit,
TR is net revenue.
Cost of sales is subtracted from revenue.
According to the data of the Profit and Loss Statement (Form No. 2), adopted in Russian legislation To calculate the profitability of sales based on gross profit, you need to divide this indicator (line 2100 of the report) 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.
Profitability of sales by gross profit based on the results three months 2015 amounted to
25 million rubles/100 million rubles = 0.25,
and for three months of 2014 22 million rubles/80 million rubles = 0.275.
The obtained calculation results 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 return on sales indicator based on gross profit is not an objective characteristic of the enterprise’s activities for the reason that it does not include in the calculation other costs that cannot be avoided: business expenses(line 2210 of the report) andadministrative expenses(line 2220 of the report).
Based on the profitability of sales based on gross profit, you can evaluate how successfully the services directly related to the purchase of goods, raw materials, supplies and their sales have worked.
The gross profit margin ratio reflects the average level of the total amount of markups, allowances and discounts for the reporting period.
To more accurately assess the efficiency of an enterprise, the return on sales formula is often used:
RP = Profit from sales (line 2200 of the report) / revenue (line 2110 of the report).
When calculating profit using this formula, administrative and commercial expenses are already taken into account, so for many enterprises the RP coefficient will reflect the real state of affairs.
Continuation of the example. In the first quarter of 2015, Temp LLC's commercial expenses amounted to 4 million rubles, and administrative expenses - 2 million rubles. Last year, in the first three months, commercial expenses amounted to 3.5 million rubles, administrative 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.
Sales profitability for the three months of 2015 was:
19 million rubles/100 million rubles = 0.19;
and for three months of 2015 17 million rubles/80 million rubles = 0.2125.
With an absolute increase in profit of 2 million rubles, return on sales decreased by 0.0225
In international practice, it is customary to calculate profitability before interest, taxes and EBITDA:
EBITDA margin = EBITDA / Sales revenue
However, to obtain an absolutely complete picture of the financial and economic activities of an enterprise, it is necessary to take into account other income and expenses incurred during the reporting period:
- income from investments in other enterprises and organizations;
- interest received from investments;
- other income;
- interest costs on commercial loans and other loans;
- payment of current income tax;
- other expenses;
Formula for return on sales based on net profit
is final for assessing and analyzing the activities of the enterprise.
Additional formulas for investors
Participants or shareholders of an enterprise are primarily interested in the question of how much profit they will receive on their invested capital. For their needs and convenience, indicators are also calculated return on total capital according to the formula.
Any sales are carried out to achieve the same goal - extraction financial profit. But it is impossible to give an objective assessment of sales effectiveness without an indicator of their profitability.
What is profitability?
Return on sales, also known as the return on sales ratio, is a percentage expression 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 revenue from product sales, multiplied by one hundred percent.
Some entrepreneurs are misled into thinking that return on sales shows profitability relative to investment. money. It is not right. The return on sales ratio allows you to determine what amount of money in the volume of products sold is the profit of the enterprise minus taxes and related payments.
This profitability indicator shows profitability solely from the sales process itself. That is How much does the cost of the product pay for the costs of the production process of the product/service? (purchase of necessary components, use of energy and human resources, etc.).
When calculating the coefficient, such an indicator as the volume 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 return on sales show an entrepreneur?
- The return on sales ratio allows you to characterize the most important thing for a company or enterprise - the sale of main products . In addition, the share of cost in the sales process is assessed.
- Knowing the profitability of sales, the company can control pricing policy and costs . It is worth noting that different companies produce goods through different strategies and technician, which causes differences in profitability ratios. But even if two companies have the same revenue, operating expenses, and pre-tax profits, their return on sales will differ. This is due to the direct impact of the amount of interest payments on the total net profit.
- Return on sales is not a reflection of the planned effect of long-term investments . The bottom line is that if a company decides to change technological scheme or purchase innovative equipment, this ratio may decrease slightly. But it will regain its positions and surpass them if the modernization strategy was chosen correctly. By the way, if you want to improve your profitability, read the article “increasing profitability of sales.”
How to calculate return on sales?
To calculate the return on sales ratio, the following formula is used:
ROS– the English abbreviation Return on Sales, which translated into Russian actually means the required profitability ratio, presented as a percentage;
NI– English abbreviation Net Income, an indicator of net profit expressed in monetary terms;
N.S.– English abbreviation Net Sales, the amount of profit received from the sale of manufactured products, expressed in monetary terms.
Correct initial data and dry calculations will allow you to determine the real profitability of sales. The formula for return on sales is simple - the resulting result is an indicator of production efficiency.
An illustrative example of calculating profitability:
Unfortunately, the general return on sales formula can only show the efficiency or inefficiency of a company, but does not answer the problem areas of the business.
Suppose, after analyzing profitability data for 2 years, the company received the following figures:
In 2011, the company earned a profit of $2.24 million; in 2012, this figure increased to $2.62 million. Net profit in 2011 was $494 thousand, and in 2012 – $516 thousand. What changes did the profitability of sales undergo 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 profitability of sales:
ROS = ROS2012 – ROS2011 = 22 – 19.5 = -2.5%.
In 2012, the company's sales profitability 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 carried out. It includes:
- Examine changes in tax costs and deductions that are required to calculate in NI.
- Calculation of profitability of a product/service. Formula:
Profitability = (revenue - cost * - costs)/revenue * 100%
- Profitability of each sales manager. Formula:
Profitability = (revenue - salary * - taxes)/revenue * 100%.
- Advertising profitability of a product/service. Formula:
*If you provide services, then the cost includes: organization of the workplace for sales managers (computer equipment, rent of sq.m., telephone equipment, utility bills proportional to the person, etc.), their salary, telephone costs, advertising, costs for the necessary software (CRM, 1C, etc.), payments for a virtual PBX.
Let us immediately note that it is possible to use a simpler formula for 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 may have a different sales structure: some sell only expensive goods and rarely, some sell small ones, but often - this is where the main difficulty will be in calculating 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 profitability has fallen because... the most marginal product ceased to be sold.
| Selling a site | Selling contextual advertising | |
|---|---|---|
| Profitability by formula | (500 thousand – 135 thousand – 90 thousand for taxes)/500 thousand = 55% | (900 thousand – 600 thousand – 162 thousand for taxes)/900 thousand = 15% |
| Sales volume per month | 500 thousand rubles (cost of 5 sites) | 900 thousand rubles (cost of 3 projects) |
| Material costs | 15 thousand rubles. (purchase of a domain, payment 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 profitability of sales is reducing costs and expenses. But at the same time, we recommend that you be careful with this point because... Negative consequences may follow in the form of deterioration in the quality of goods (services) and a decrease in the efficiency of specialists. To avoid this, it is necessary to approach the issue of increasing sales profitability in a comprehensive manner! It includes studying: The table shows that, despite the fact that contextual advertising brought more money to the company’s bank account, its profitability is 3.7 times lower. This means that if managers sell websites poorly, but well contextual advertising– this means that a decrease in profitability cannot be avoided.
- Competitors
- Sales and Cost Structures
- Sales channels
- CRM uses
- Managers' effectiveness
After studying all this, you can move on to developing sales tactics and strategies. And only now make operational decisions.
The completed data shows that it is possible to increase the costs of the offices page because they provide the greatest profitability for the business.
Calculating profitability for all layers is quite a labor-intensive task, especially if you have not done this before, and analysis is required over several months or even years (more than one week). And still, in the end, you may 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, developing recommendations, executing and monitoring the optimization of the sales department to increase business profitability.