Table of contents:
- What is this?
- What kinds are there?
- Sales profitability analysis
- What is it for?
- Return on sales formula
- What influences efficiency?
- How often should it be calculated?
- How can I increase the rate?
2023 Author: Henry Conors | [email protected]. Last modified: 2023-11-26 12:05
Every person who decides to start a business is primarily concerned with the following question - how much can I earn? How to calculate return on sales? Is it profitable to start your own business? Or how to raise the profitability of an existing organization whose income does not suit the owner? Let's answer all these questions in order.
What is this?
First you need to understand what profitability is. Profitability is an indicator of how effective the economic policy of the organization is, how profitably the company's assets, attracted external capital, equipment, and so on are used.
Calculate these parameters, of course, without fail, even before the start of the organization's work in the future. Otherwise, you can "get burned" by starting a business that is incapable of life. And, of course, do not forget about the periodic monitoring of efficiency in an enterprise already existing on the market and the refinement of lagging coefficients. Only in this case it will be possible to speak aboutprofitability of the company as a whole and its competitiveness in the market.
What kinds are there?
Profitability can be expressed in different indicators, therefore, speaking about it, it will be correct to indicate the parameter that interests us at the moment.
Its main types include:
- Return on assets - indicates how much profit the company manages to get in relation to the invested funds.
- Production profitability - will show how profitable the current production and used capacities are for the enterprise.
- The profitability of sales of the enterprise - will give an understanding of what percentage of total revenue is net profit.
- Personnel profitability - characterizes how effectively employees operate.
Sales profitability analysis
This article discusses in detail one of the parameters, namely the sales effectiveness of the organization. This indicator gives an understanding of the level at which the company as a whole earns profit. Often, it is the level of return on sales that is used to compare different firms within the same industry. Although here, too, its meanings can have significant differences. This is due to the diversity of strategies of competing enterprises and the range provided to consumers.
What is it for?
How to calculate the return on sales correctly is a very important issue for every company. If not analyzedindicators of their work, you can do business at a loss, and this is no longer interesting to anyone. It is important to understand that not all money coming into a firm is its profit. A timely analysis shows what part of the money the organization will have after the cost of goods is deducted, taxes and bank commissions are paid, if lending takes place.
Return on sales formula
The indicator shows the net profit of the enterprise for each received ruble of revenue. Calculate it as follows:
Return on sales (value)=Net profit/Revenue.
In this case, the parameters are taken in monetary terms and for the same time period. The nominal values of these components must be sought in the accounting book. It is also worth noting that different types of profit can be used for calculation: net or before taxation and other expenses (it is also gross). After the calculation, we get the efficiency, expressed as a percentage. If the indicator does not suit the company, you need to think about optimizing the pricing policy or pay attention to the costs associated with the production and sale of goods.
What influences efficiency?
In order to navigate efficiency problem-solving strategies as effectively as possible, you need to know the factors that affect sales margins. They can be internal and external. And if the first firm can fullyregulate independently, then under the latter there is an opportunity only to adapt in time.
Internal factors, in turn, are divided into production and non-production.
- The former are directly related to the main activities of the company and cover the availability and proper use of labor tools, their means and resources. The impact of production can be extensive (these are quantitative indicators: the purchase of the latest equipment, expansion of production facilities, an increase or decrease in stocks of raw materials and finished products) and intensive (these are quality characteristics: improving the skills of employees, improving technologies, reducing defects).
- The second is the timely fulfillment of obligations to the organization, the remoteness of partners and buyers from the company, which is important when transporting goods, sanctions and fines of the company.
External factors include demand and competition in the market, inflation, rising prices for raw materials and fuel, government sanctions and more. Each enterprise needs to independently and timely study the market as a whole, its immediate opponents and change its policy if necessary.
How often should it be calculated?
The indicator is not able to evaluate the profit from long-term investments. This, by the way, explains why the parameter may temporarily decline in cases where the organization invests significant amounts in its own production or marketing, expandsterritory of action. Return on sales, the formula of which evaluates the company's performance, is able to demonstrate results only for the given reporting period. It is recommended to take into account two time periods: the first is the one during which the parameters were the best (it is desirable to save it and always use it in the future), the second is the reporting period, which just needs to be checked. From their comparison with each other, one can draw conclusions whether there is progress or regression.
How often the return on sales is determined by the organization depends only on the company itself. This can be done once a year, once a month, or every week. Naturally, the more often monitoring is carried out, the faster the necessary measures can be taken to increase the indicator. So it is in the interests of the enterprise itself to carry out the appropriate re-registration regularly.
How can I increase the rate?
How to calculate the profitability of sales is understandable. But how can you increase it? There are different ways to do this, and the choice of one or more of them will come from various factors: fluctuations in demand from buyers, studying competitors, and the general dynamics of the market. At the root of each of the options will be the main law: in order to change the profitability upward, you must either raise the price or reduce the cost of goods. We will take a closer look at the main areas for increasing efficiency.
The first way is to increase production capacity, which can help reduce production costs, thereby increasing profits. Forthe same goals, you can look for a supplier who offers the best price for the same quality of raw materials or services.
Second - improving the quality of a product or service. Inefficiency may arise due to the company's uncompetitive offer compared to other organizations occupying a similar niche in the market.
The third option is to change marketing strategies. They differ depending on the scale of the company, its financial capabilities. Huge corporations have long successfully had entire relevant promotion departments. However, small businesses should not forget about good advertising, and besides, you can find your own decent marketing policy for any budget. The main thing in this difficult business is creativity. Give the consumer something that he has not seen before, and he will definitely come to you.
The fourth way is staff motivation. Maybe the main problem lies in the fact that employees do not see the point in doing their job efficiently? Maybe they are not interested in the growth of demand for products? In this case, you can award bonuses to the best, penalize the worst … What can I say, personnel management is a completely separate topic that needs to be studied in detail. And it is worth paying attention to both workers and managers.
Another option to increase the profitability of sales is to increase the cost of production. Maybe the company's prices lagged behind the market? Or has the cost become higher, while prices have remained at the same level? In addition, inflation and rising prices in the market are commonplace and should be monitored periodically. If athe reason lies in this, the pricing policy needs to be urgently changed.
Sales profitability is the main performance indicator of absolutely every organization. Each company, of course, is interested in increasing its own profits, because for this people start their own business. For such purposes, constant study and analysis of their work will be at least not superfluous. It follows that knowing how to calculate the profitability of sales, you can understand how to increase this parameter, thereby developing your enterprise.
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