Return on Sales Formula
The general formula for determining profitability only tells us whether the company is operating efficiently or not, but does not show which segments of the business have problems.
Let's say a company calculated bolivia phone data profitability for two years, and the analysis yielded the following data: in 2022, the company's profit was $2.24 million, and in 2023, the profit was $2.62 million. In 2022, net profit was $594 thousand, and in 2023, it was $516 thousand. Let's see how profitability has changed:
The profitability ratio for 2022 was: ROS (2022) = 594 / 2240 = 0.2205 (22%).
The profitability ratio for 2023 was: ROS (2023) = 516 / 2620 = 0.1947 (19.5%).
Thus, the change in sales profitability was: ROS = ROS (2023) - ROS (2022) = 22 - 19.5 = - 2.5%.
Thus, using the formula for calculating the return on sales, we found that it decreased by 2.5% in 2023.
Disadvantages of the Net Profit Return on Sales Formula
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We see that profitability has fallen over the past two years, but the reasons are unknown. They can only be determined by conducting a more detailed analysis, which includes:
Assessing the change in tax and deduction costs - this is required for NI calculations.
Determining the profitability of manufactured products.
Calculation of profitability is individual for each sales manager.
Calculating the profitability of product advertising.
If you provide any services, their cost price includes: equipment for the sales managers’ workplace (computers and office equipment, telephone, proportional payment of utility bills, rent per m2 ) , payment for their labor, payment for communication, advertising, purchase of software, payment for virtual PBX.
You can use a simpler formula for calculating sales profitability based on gross profit:
ROS = GP (gross profit) / NS (total revenue).
But it is better to define it for calculating narrow indicators, such as the profitability of a specific product, manager, website page, and so on.
Each employee may have their own sales system: one sells expensive products rarely, while the other sells cheaper products more often. In this case, it will be difficult to determine the net profit, i.e. the margin after tax payments. You need to know the margin for each product and each seller (data is available in the CRM system). Perhaps the drop in profitability is due to the fact that sales of the most marginal products have decreased.
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