Financial analysis uses various tools to assess the sustainability of an enterprise’s position in the market and the effectiveness of management decisions.
The main one is profitability calculation, which analyze the relative profitability, which is calculated as a share of the costs of financial resources or property.
You can calculate profitability:
- Sales;
- Assets;
- Production;
- Capital.
The most striking indicator of a company's financial condition is return on sales.
The indicator value is used for:
- Exercising control for the profit of the enterprise;
- Control of profit or unprofitability of sales by product category;
- Monitoring compliance with tactical goals strategic;
- Comparisons of indicators with the industry average.
Return on Sales - Definition
Return on sales – This is a financial instrument that allows you to estimate how much profit is included in each ruble that the company receives as a percentage of gross revenue.
Profitability clearly demonstrates the share of profit in product revenue.
The calculation of profitability is distinguished:
- by gross profit;
- by profit on the balance sheet;
- by operating profit;
- by net profit.
How to calculate the profitability of sales on the balance sheet?
Using balance sheet data and Form 2 (financial results), you can easily calculate the return on sales indicator.
RP=profit (loss) from sales/commodity revenue indicator
- RP balance = line 050/line 010 (form 2);
- RP balance = line 2200/line 2010.
How to calculate gross and operating profitability?
RPVP =VP / TV, Where
VP— gross profit from sales of goods;
TV— revenue from sales of goods.
Gross profit- the sum of the entire profit of the enterprise, the difference between commodity revenue and the amount of expenses that was used to produce products, that is, cost.
OR = EBIT / TV, Where
EBIT- profit before taxes or interest have been subtracted from it.
EBIT- this is an indicator between the net profit of the enterprise and all profit.
EBIT = PE - PR - NP, Where
Emergency- net profit;
ETC— expenses as a percentage;
NP— the amount of income tax.
Net return on sales
Level of net return on sales or RP for net profit– is the share of net profit from the gross revenue of the enterprise.
This is one of the most visual indicators of the efficiency of an enterprise, as it shows how many kopecks of net profit are contained in one ruble of company sales.
RP pure = PE/TV, Where
- Emergency- net profit;
- TV– commodity revenue (gross revenue) of the enterprise.
These indicators can be obtained in two ways:
- Find in the company's statements, namely in Form 2 “Report on financial results”
- If the first option is not acceptable for some reason, then you can independently calculate the necessary indicators.
TV = K*C, Where
- TO– quantity of products sold in units;
- C– unit price.
PP = TV – S/S – N – R others + D others, Where
- S/S– total cost of production;
- N– taxes;
- R other- other expenses;
- D other- Other income.
Others include income and expenses from non-core activities of the enterprise:
- Coursework difference;
- Income/expenses from the sale of various securities;
- Income from equity participation.
Return on sales is a clear indicator for determining the share of various types of profit in the gross revenue of an enterprise.
By tracking the profitability indicator over time, the company manager receives information about the dynamics of development and the pace of achievement of the strategic goals outlined by the management of the enterprise.
Return on sales - meaning
Return on sales– this is a kind of litmus test for determining the effectiveness of an enterprise’s pricing policy. Can be used to control company costs.
Having made the necessary calculations, the company manager will see how much money will remain after covering costs at cost and making all necessary payments (interest on loans, settlements with the budget, etc.).
The return on sales indicator is a tool for analyzing the financial condition of the reporting period. It is not suitable for medium- and long-term strategic planning.
- The KRP has grown.
This situation indicates:
- The increase in expenses lags behind the receipt of funds from the activities carried out.
Prerequisites:
- Increase in volumes of commodity revenue, which is most likely associated with an increase in the volume of sales of goods or provision of services. In this case, the so-called production leverage effect arises;
- Changing the range of products sold, which is a good alternative to increasing prices for goods to increase the gross revenue of the enterprise. At the same time, the cost of production can be significantly reduced, which will also lead to an increase in product revenue.
- Reducing costs occurs faster, generating cash for the enterprise's activities.
Causes:
- Increased cost of production(goods or services);
- Range of products sold has changed significantly.
For any of the above reasons, the profitability of sales formally increases. The share of profit will become larger, but in physical terms it will remain unchanged or decrease.
Cause- This is a decrease in product revenue. This increase in the indicator is not clearly positive. It is necessary to track the situation over time. And also analyze the product range and pricing mechanism.
- The money supply from ongoing activities grows, and the company’s expenses fall.
Prerequisites:
- Change pricing policy;
- Sales structure changed;
- Costs have changed according to the regulations.
This state of affairs is the most acceptable and desirable for the enterprise. Further analysis in this case should be aimed at calculating the stability of the company's position.
- The CRP has decreased.
This situation means that:
- Increase in money supply from ongoing activities I can’t keep up with the increase in company expenses.
Prerequisites:
- Increased expenses against the backdrop of inflation;
- Changing the company's pricing policy towards maximum reduction in the cost of products (goods, services);
- Changes in demand for goods;
- A decrease in the indicator is extremely unfavorable regardless of which reason had the greatest impact.
- The decrease in the growth of money supply from the sale of products occurs faster than reducing the company's expenses.
Prerequisites:
- Demand for products enterprises fell significantly.
- The situation is quite standard. Almost every enterprise has seasonal activity. However, it is necessary to analyze what is causing the drop in sales.
- Expenses increased amid decrease commodity revenue.
Prerequisites:
- Reduced product costs(goods or services);
- Changes in demand for various groups of goods enterprises.
- The trend is extremely unfavorable. It is necessary to control the sales structure, the pricing policy of the enterprise and the cost accounting system.
Any sales are carried out to achieve the same goal - making 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 the money invested. 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 techniques, 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 its technological scheme or purchase innovative equipment, then this coefficient 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 sell contextual advertising well, then 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.
One of the main indicators of an organization's performance is return on sales based on net profit. What does this indicator characterize? How is it calculated? All the details are below.
What is return on sales based on net profit?
The concept of profitability is directly related to the success, that is, profitability of any business. This financial indicator can be calculated for the enterprise as a whole or separately for its divisions (types of activity). In the process of calculations, it is easy to determine the return on assets, fixed assets (fixed assets), sales, goods, capital, etc. First of all, the calculation is based on the analysis of income accounting data for a certain time period.
Analysis of profitability values allows you to find out how effective is the management of the funds invested in the creation and further development of the company. Since calculations are carried out as a percentage or as a coefficient, the higher the results obtained, the more profitable the business is considered. Profitability calculation is used in the following situations:
- For short- and long-term profit forecasting.
- When receiving credits and loans.
- When developing new directions and analyzing existing types of commercial activities.
- During industry benchmarking.
- In order to justify upcoming investments and investments.
- To establish the real market price of a business, etc.
The return on sales indicator indicates what part of the company's revenue is profit. In other words, how much income did each ruble of sold products (works or services) generate? By managing this ratio, the head of the company can adjust the pricing policy, as well as current and future costs.
Return on sales based on net profit - formula
When calculating the indicator, the organization's accounting data for a given period of time is used. In particular, to determine the profitability of sales, information on net profit is required, which is indicated on page 2400 f. 2 “Report on financial results” (the current form was approved by the Ministry of Finance in Order No. 66n dated 07/02/10).
The formula looks like this:
RP = PE of the company / B, where:
RP is the value of return on sales,
PE - the amount of net profit (line 2400 f. 2),
B – the amount of revenue (line 2110 f. 2).
Additionally, to refine the indicators, you can calculate gross profit margin or operating profitability. Formulas change in accordance with specified goals:
RP for VP = VP of the company / B, where:
RP for VP - gross profit margin,
VP of the company - gross profit of the company (line 2100 f. 2),
B is the amount of revenue.
Operating RP = Profit before taxation (line 2300 f. 2) / V.
What return on sales value is considered normal?
We have already found out that RP shows the level of profit for a certain period. In dynamics, this coefficient helps to establish how the profitability of a business changes over time. To do this, analyze data for several periods - basic and reporting. Then it is easy to calculate the profit margin by performing factor calculations.
What profitability value is considered normal? There is no clear answer to this question. Optimal indicators depend on the type and specifics of the activity of the enterprise or its division. Of course, the higher the value obtained, the better, but the results can also be influenced by such factors as the duration of the production cycle, the presence of investments, etc.
The average indicator of good profitability is considered to be a coefficient in the range of 20-30%, average - 5-20%, low - 1-5%.
Analysis of the efficiency of an organization is impossible without taking into account profitability indicators. An indicator characterizing the profitability of an activity or, in other words, economic efficiency is the concept of profitability.
This parameter demonstrates how effectively the company uses available economic, labor, monetary and natural resources.
For non-profit structures, profitability is the main indicator of operational efficiency, and in commercial divisions, quantitative characteristics calculated with greater accuracy are important.
Therefore, there are many types of profitability: profitability of production, profitability of products, return on assets, etc.
But, in general terms, these indicators can be compared with efficiency indicators, the ratio between the costs incurred and the resulting profit (the ratio of expenses to income). A business that generates profit at the end of reporting periods is profitable.
Profitability indicators are necessary to carry out financial analysis of activities, identify its weaknesses, plan and implement measures to increase production efficiency.
Types of profitability are divided into those that are based on the cost approach, the resource approach or the approach that characterizes the profitability of sales.
Different types of profitability calculations have their own objectives and use many different accounting indicators (net profit, cost of production, selling or administrative expenses, sales profit, etc.).
Profitability of core activities.
Refers to cost indicators and characterizes the efficiency of not only the company’s core activities, but also work related to the sale of products. Allows you to evaluate the amount of profit received per 1 ruble spent.
This takes into account the costs associated with the direct production and sale of core products.
It is calculated as the ratio between profit from sales and the amount of cost of production, which includes:
- cost of goods, works, products or services sold;
- cost of business expenses;
- cost of administrative expenses.
Characterizes the organization’s ability to independently cover expenses with profit. Calculating the profitability of an enterprise is used to assess the efficiency of its work and is calculated using the formula:
Genus = Prp/Z,
Where Z are costs, and Prp is the profit received from sales.
The calculations do not take into account the time elapsed between production and sale.
Return on current assets.
The profitability of current assets (otherwise known as mobile, current) assets shows the profit received by the organization from each ruble invested in current assets and reflects the efficiency of using these assets.
Defined as the ratio between net profit (i.e., remaining after tax) and current assets. This indicator is intended to reflect the organization's ability to provide a sufficient amount of profit in relation to the working capital used.
The higher this value, the more efficiently working capital is used.
Calculated by the formula:
Rotot = Chn/Oa, where
Rtot is the overall profitability, net profit is Chp, and Oa is the cost of current assets.
Internal rate of return.
A criterion used to calculate the effectiveness of an investment. This indicator allows you to assess the feasibility of investing in investment projects and demonstrates a certain discount rate at which the net cost of funds expected in the future will be equal to zero.
This refers to the minimum rate of return when the investment project under study assumes that the minimum desired rate of return or the company's cost of capital will exceed the lower internal profitability rate.
This calculation method is not very simple and involves careful calculations. In this case, inaccuracies made during the calculation can lead to final incorrect results.
In addition, when considering investment projects, other factors are taken into account, for example, gross profitability. But it is on the basis of calculating the internal rate of return that the enterprise makes investment decisions.
Profitability of fixed assets.
The presence of profit as an absolute indicator does not always allow one to obtain a complete picture of the efficiency of an enterprise. For more accurate conclusions, relative indicators are analyzed, showing the effectiveness of specific resources.
The process of operation of some enterprises depends on certain fixed assets, therefore, in order to generally improve the efficiency of operations, it is necessary to calculate the profitability of fixed assets.
The calculation is carried out according to the formula:
Ros = Chp/Os, where
Ros - profitability of fixed assets, Chp - net profit, Os - cost of fixed assets.
This indicator allows you to get an idea of what part of the net profit is accounted for per unit of cost of the organization's fixed assets.
Calculation of profitability of sales.
The indicator reflecting net profit in total revenue demonstrates the financial performance of the activity. The financial result in the calculations can be different profit indicators; this leads to the existence of several variations of the indicator. Most often these are: profitability of sales by gross profit, by net profit and operating profitability.
What is the return on sales formula? Find the answer in this article.
Formulas for calculating profitability of sales.
For gross profit: Рппп = Вп/В, where Вп is gross profit, and В is revenue.
Gross profit is the difference between revenue received from sales and cost of sales.
For net profit: Rchp = Chp/B, where Chp is net profit, and B is revenue.
Operating profitability: Op = EBIT/B, where EBIT is profit calculated before taxes and deductions, and B is revenue.
The optimal value of return on sales depends on the industry and other characteristics of the enterprise.
Thus, in organizations that use a long production cycle, such profitability will be higher than those companies that operate with high turnover, although their efficiency may be the same.
Sales efficiency can also show the profitability of products sold, although it takes into account other factors.
Profitability threshold.
It also has other names: critical volume of production or sales, critical point, break-even point. Designates the level of business activity of an organization at which total costs and total income are equal to each other. Allows you to determine the margin of financial strength of the organization.
Calculated by the following formula:
Pr = Zp/Kvm, where
Pr is the profitability threshold, Zp is fixed costs, and Kvm is the gross margin ratio.
In turn, the gross margin coefficient is calculated by another formula:
Vm = B – Zpr, where Vm is the gross margin, B is revenue, and Zpr is variable costs,
Kvm = Vm/V.
The company incurs losses when sales volume is below the profitability threshold and makes a profit if this indicator is above the threshold. It is worth noting that as sales volume increases, fixed costs per unit of production decrease, but variable costs remain the same. The profitability threshold can also be calculated for individual types of services or products.
Cost effectiveness.
It characterizes the return on funds spent on production and shows the profit received from each ruble invested in production and sales. Used to evaluate the effectiveness of spending.
It is calculated as the ratio between the amount of profit and the amount of expenses that brought this profit. Such expenses are considered decapitalized, written off from the balance sheet asset, and presented in the report.
The cost return indicator is calculated as follows:
Pz = P/Dr, where P is profit, and Dr is decapitalized expenses.
It should be noted that the calculation of cost-benefit indicators demonstrates only the degree of return on expenses spent on specific areas, but does not reflect the return on invested resources. This task is performed by return on assets indicators.
Factor analysis of cost-effectiveness.
It is one of the parts of financial analysis and, in turn, is divided into several models, of which the most commonly used are additive, multiplicative and multiple.
The essence of constructing such models is the creation of a mathematical relationship between all the factors under study.
Additive ones are used in cases where the indicator will be obtained as the difference or sum of the resulting factors, multiplicative - as their product, and multiples - when the factors are divided into each other to obtain the result.
Combinations of these models produce combined or mixed models. For a full factorial analysis of profitability, multifactor models are created that use various profitability indicators.
Return on sales- an economic indicator that reflects the company’s income for each ruble received as a result of sales, or reflects the share of profit in the total volume of goods or products sold. Sales profitability comes from the German concept rentabel - profitable or profitable, and has been an economic and marketing relative indicator of the economic efficiency of sales activities since ancient times.
In practice, sales efficiency is determined by the return on sales ratio. Calculation formula return on sales ratio- the ratio of the company’s net profit to revenue multiplied by 100%
Coeff. Rentab.Sales = (Profit / Revenue) * 100%
The Western accounting system declares the concept Return on Sales (ROS) and gives the following calculation formula:
Operating Margin = Operating Income / Revenue
That is, the ratio of operating profit to revenue. In other words, return on sales (ROS) is how much money from the volume of products sold is the company’s profit.
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