Return on Sales Percentage Calculator
Return on sales (ROS) percentage calculator is a tool used to determine the profitability of a company based on its net income and revenue. It helps understand how much of your sales are actually the profit versus your operating costs. It’s a crucial factor in determining how effective your sales strategies are and how much budget you should allocate to your sales department. The higher your return on sales ratio, the more profitable your business is.
What Is Return On Sales?
Return on sales rate refers to the percentage of net profit a company makes from its sales after deducting all the operating costs. It is calculated by dividing your business’s operating profit by your net sales revenue for a specific period.
How to Calculate Return On Sales?
To use the ROS percentage calculator, you need to input the company's net income and revenue. Here’s how teams can calculate Return On Sales:
Return on Sales = (Operating Profit / Net Sales) * 100
For example, your company made a sales revenue of $10,00,000 in 2022 and spent $8,00,000 in expenses. To calculate your operating profit, you would need to subtract your expenses from your revenue.
In this case,
Operating profit = Sales Revenue - Operating Costs
= $10,00,000 - $8,00,000
Return On Sales % = (Operating profit / Sales Revenue) * 100
= ($2,00,000 / $10,00,000) * 100
In other words, you make $20 for every $100 of sales your company produces. It’s vital to note that operating costs don't include non-operating activities like income tax and interest expenses.
Why Calculating Return On Sales Is Important?
Return on sales indicates how much profit your company is generating. It measures the overall performance of your company by analyzing the percentage of operating profits from the net sales of the company. It helps stakeholders and creditors understand the company’s ability to repay its loan and any potential dividends.
It’s wrong to assume that the return on sales will be higher if the revenue goes up. A company’s expense and revenue can vary and thus, return on sales gives an accurate figure on the overall performance.
Moreover, comparing the return on sales percentage of the current period with that of previous periods helps gauge a company's internal efficiency over time as well as analyze different trends.
Tips to Increase Return On Sales
Here are a few ways you can increase return on sales –
#1: Increase the Price Of Your Item/Service
One of the easiest ways to increase return on sales is to simply increase the price of your product or service. However, you need to be considerate and do market research to ensure that you are not overcharging your customers.
#2: Bring Down the Cost of Raw Materials
If you can’t increase the price of your product or service, you can try to bring down the cost of your inventory. You can try to negotiate a better rate with your supplier. In case they don’t budge, you can try looking for other vendors. It will drastically reduce your production costs, resulting in increased operating profit.
#3: Increase Sales Volume
Increasing sales volume can lead to economies of scale, which can lower costs and increase profits. This can be achieved by expanding the customer base, entering new markets, or introducing new products and services.
#4: Improve Productivity
Improving productivity can increase efficiency and reduce costs. This can be achieved by streamlining processes, investing in technology, and improving staff training.
Measure your company's profitability with our return on sales percentage calculator and make informed decisions to improve your bottom line with this Excel/Google Sheet template.
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