Keeping track of the company's success, controlling income and expenses, understanding the amount of net revenue is the key to a successful business. This is why ROI is so important, as it provides a clear picture of the company's profitability.
Profitability of sales concept
Return on sales is an indicator that reflects the required share of net profit in the total sales of the organization.
Without profitability, it is difficult to understand how successful the enterprise is, whether it is profitable or unprofitable, efficient or not, how it will develop in the future, and what should be done at the moment to increase income while reducing unnecessary costs. The calculation of profitability indicators helps to identify the effectiveness of the organization in sufficient detail.
The calculation of profitability is carried out:
- to monitor the profit of the enterprise;
- to control business development;
- for comparison with the profit from sales of competing companies;
- to determine profitable and unprofitable sales, etc.
To understand more clearly what the net profit is and how to withdraw it as soon as possible, it is recommended to refer to the fairly common formula for finding profitability.
Formulas for analyzing profitability of sales
It is important to understand that it is not at all necessary to have super-capable mathematical knowledge in order to calculate the formula and find out the profitability of your enterprise. It is very simple and looks like this:
ROS = NI: NS, where ROS (from English Return on Sales) is the profitability of the company's sales, NI (from English Net Income) - net profit in a specific currency, NS (from English Net Sales) - revenue or net from all sales of the organization.
To find out the profitability, you need to divide the net profit by the total revenue as a whole. And then the resulting indicator will be perfectly visible.
Another fairly well-known formula for calculating gross profit to net sales, taking into account value added tax, is:
ROS = GP: NS
In this case, the net profit is the main component of the gross profit GP (from the English Gross Profit), which ultimately gives the desired result.
Results of the analysis of profitability of sales
By doing this profitability analysis on a regular basis, you can find a lot of necessary and very useful information. In particular, to understand how production is developing at an enterprise, to identify its effectiveness, to understand what should be corrected and what should be left unchanged.
Proceeding from the fact that there is nothing more important than constantly increasing your income, the calculation of profitability should be carried out regularly and all the results obtained must be recorded.
