In order not to burn out and not go bankrupt, you must keep your finger on the pulse of the economic situation. One must always have an idea of the real state of affairs. If there is reliable accounting information, then mathematics will help to find out in what condition the enterprise is. And if in more detail - then the profitability coefficient of sales.
general information
The profitability ratio of sales shows the financial result of the organization, concentrating on how much of the revenue is profit. It should be noted that different approaches and characteristics can be used for calculations, which creates different variations of this indicator. What is used most often? This is the return on sales by net or gross profit. But the emphasis can be placed on the operational component.
Example
You can talk a lot about the profitability ratio of sales. The formula will allow you to understand it and use knowledge to your advantage. Let's consider, taking net profit as the main value. The formula in this case is as follows: KRP = PE / OP * 100%. The first reduction (PKK) stands for "return on sales ratio". This is, in fact, the indicator we need. PE is net profit. OP is the sales volume. Here is a simple formula. But it allows you to calculate the coefficient of net profitability of sales.
Data for calculations should be taken from the report, where profit and loss are summarized. The resulting value allows you to evaluate the company's income for each ruble earned. This is potentially useful for interpreting available turnover data, as well as for preparing economic forecasts in a limited market that inhibits sales growth. In addition, the coefficient can be used to assess the effectiveness of different companies that work within the same industry.
Change the values
The formula itself will not change. If the company faces a specific task or difficult conditions, then instead of an emergency should substitute:
- operating profit;
- gross margin;
- profit before taxes (and sometimes up to interest).
If you know the value of the coefficient of profitability of sales, then for starters, in order to have an understanding of the situation on the market, it is enough to compare its value with the similar characteristics of other enterprises that are here.
And based on these data, we can say whether the activity is successful, what is being carried out and whether the organization has a future while maintaining this tactic. And all this allows you to find out the profitability ratio of sales. There is no normative value for it, but if you want to navigate this issue, you can do the following: find the average value for the economic sector, for which it is necessary to use state statistics. If your own result is higher, then this is good and there is potential. And if the value is lower, the situation should be changed.
How to increase the profitability of sales?
Conditionally, there are three options:
- Increase in revenue as a percentage of cost. The reasons are the growth in sales volumes and changes in the assortment. In this case, you can pay attention to variable and fixed costs. The structure of the cost price greatly affects the size of the profit. So, if you invest in fixed assets, then fixed costs will increase. At the same time, there is a chance to reduce the variables. It should be noted that this dependence has a nonlinear character. Therefore, the optimal combination is difficult to find. The change in the range of products offered also favorably affects revenue growth.
- Costs decrease faster than revenues. The reasons are the increase in the cost of products, work, services or changes in the assortment of sales. Formally, the profitability ratio is growing, but the volume of revenue is falling. This trend cannot be called favorable. To draw the right conclusions, you need to analyze the pricing and the proposed range.
- Revenue is growing, costs are falling. The reasons are price increases, changes in spending standards and / or assortment of sales. This is the most favorable trend. Organizations are interested in such a sustainable direction of development.
Lowering
Alas, not everything is good. Often, your return on sales ratio goes down. Here is a short list of options and reasons:
- price reduction;
- increase in cost standards;
- changes in the structure of the assortment of sales;
- rising cost inflation is outpacing changes in revenue.
This is an unfavorable trend. To rectify the situation, it is necessary to analyze pricing, cost control system, assortment policy. It may be that revenue will fall faster than spending. A possible reason for this situation is a decrease in sales. It should be noted that this situation is very common in those cases when the company reduces its activity in the market. Then you need to conduct a thorough analysis of the marketing policy of the company.
It may be that the costs increase, and the revenue decreases. The reason for this state of affairs is a decrease in prices, changes in the structure of the assortment of sales and / or an increase in cost standards. In this case, you need to conduct an analysis of pricing and revise the control system. Such a situation often arises either due to changes in operating conditions (competition, demand, inflation), or with an ineffective accounting system for production.
Other formulas
One formula has already been considered. Let's briefly focus on two more. The first is PKK = Gross Profit / Revenue. To translate into percentages, you can multiply by 100%. This formula is used to display the difference between the cost of sales and revenue. The second looks like this and is written as follows: PKK = Profit before tax and interest / Revenue * 100%.
Conclusion
And finally, I want to consider a few more points. The first concerns sales volume. Immediately, not everyone can understand what this characteristic is. But she has a middle name that should bring clarity - revenue. In different literature, in the same context, these two concepts are used, therefore, when you see such a change, do not worry, you can continue to consider the formulas. And the second point is the normative value. Previously, it has already been casually reviewed, but it will be useful to supplement it.
When there are organizations with the same financial efficiency, then with a long production cycle, profitability will be higher. If the enterprise operates in a high-speed sphere, then one cannot count on great importance. It should be noted that profitability can show a profitable or unprofitable enterprise, but it does not provide data on whether it is profitable to invest in it. Therefore, to obtain an answer to this question, you can use other indicators and formulas that will help to understand the situation that is taking place.