Each person who decides to start a business is primarily concerned with the following question - how much can I earn? How to calculate your return on sales? Is it profitable to start a business? Or how to increase the profitability of an existing organization whose income does not suit the owner? We will answer all these questions in order.
What it is?
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.
Of course, these parameters must be calculated without fail even before the organization starts working in the future. Otherwise, you can "get burned" by starting a business that is incapable of life. And, of course, do not forget about periodic monitoring of efficiency in an enterprise that already exists on the market and the refinement of lagging factors. Only in this case it will be possible to talk about the profitability of the company as a whole and its competitiveness in the market.
What types are there?
Profitability can be expressed in different indicators, therefore, speaking about it, it will correctly indicate the parameter that interests us at the moment.
Its main types include:
- Return on assets - indicates how much profit the company manages to obtain in relation to the invested funds.
- Profitability of production - will show how profitable for the enterprise the current production and used capacity.
- Profitability of sales of the enterprise - will give an understanding of what percentage of total revenue is net profit.
- Profitability of staff - characterizes how efficiently employees work.
Return on sales analysis
This article discusses in detail one of the parameters, namely the organization’s sales efficiency. This indicator gives an understanding of the level at which the company as a whole makes a profit. Often, it is the level of profitability of sales that is used to compare different firms within the same industry. Although here its values can have significant differences. This is due to the variety of strategies of competing enterprises and the range provided to consumers.
What is it for?
How to calculate the profitability of sales correctly is a very important issue for each company. If you do not analyze your performance indicators, you can do business at a loss, and this is no longer interesting to anyone. It is important to understand that not all money received by the company is its profit. Timely analysis, however, shows how much of the money will remain with the organization after the cost of goods has been deducted, taxes and bank commissions paid, if there is credit.
Return on Sales: Formula
The indicator shows the net profit of the enterprise for each ruble of revenue received. 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 book of accounting. It is also worth noting that different types of profit can be used for calculation: net or before tax and other expenses (it’s gross). After 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 affects efficiency?
In order to navigate the strategies for solving efficiency problems as efficiently as possible, you need to know the factors that affect sales profitability. They can be internal and external. And if the former can completely regulate the former independently, then the latter can only be adjusted in time.
Internal factors, in turn, are divided into production and non-production.
- The former are directly associated with the main activity of the company and cover the availability and proper use of labor tools, their means and resources. The impact of production is extensive (these are quantitative indicators: the acquisition of the latest equipment, expansion of production facilities, increase or decrease in stocks of raw materials and finished products) and intense (these are quality characteristics: improving the qualifications of employees, improving technologies, reducing defects).
- The second is the timely fulfillment of obligations to the organization, the remoteness of partners and customers from the company, which is important when transporting goods, sanctions and fines of the company.
External factors include demand and market competition, 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 is it worth counting?
The indicator is not able to measure the profit from long-term investments. This, by the way, explains the fact that the parameter may temporarily decline in those cases when the organization invests significant amounts in its own production or marketing, and expands the area of operation. Return on sales, the formula of which measures the effectiveness of the company, is able to demonstrate results only for the 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 preserve and always use in the future), the second is the reporting one, which just needs to be checked. From their comparison with each other, conclusions can be drawn whether there is progress or regression.
How often the profitability of sales is determined by the organization depends only on the company itself. This can be done once a year, per month, and 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 appropriate rediscounts regularly.
How can I raise 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: fluctuation in demand from customers, study of competitors, general market dynamics. At the root of each of the options will be the main law: in order to change profitability upward, you must either raise the price or reduce the cost of goods. We will take a closer look at the main directions of increasing efficiency.
The first way is to increase production capacity, which can help reduce production costs, thereby increasing profits. For the same purposes, you can search for a supplier who offers the best price for the same quality of raw materials or services.
The second is improving the quality of a product or service. Inefficiency may arise due to the uncompetitive offer of the company compared to other organizations that occupy a similar niche in the market.
The third option is to change marketing strategies. They vary depending on the size of the company, its financial capabilities. Large corporations have long successfully existed whole relevant departments of promotion. However, small businesses should not forget about good advertising, in addition to any budget, you can find your decent marketing policy. The main thing in this difficult matter is creativity. Give the consumer what 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 increasing demand for products? In this case, you can accrue bonuses to the best, fine the worst … What can I say, personnel management is a completely separate topic that needs to be studied in detail. Moreover, it is worth paying attention to both workers and managers.
Another option to increase sales profitability is to increase the cost of production. Can company prices lag behind market prices? Or did the prime cost become higher, while the prices remained the same? In addition, inflation and rising prices in the market are commonplace, and this should be monitored periodically. If the reason lies in this, the pricing policy must be urgently changed.
