The calculation of the normative value of return on sales for industrial enterprises and other organizations is extremely important in the management of the company. Knowing these indicators, you can conduct a qualitative economic analysis and improve the efficiency of the enterprise. If a company wants to maintain its market position or even improve it, then it is very important to carry out such calculations for short periods. This will allow not only better management of the organization, but also provide an opportunity to respond in a timely manner to any changes in the market.
Basic concepts
Before you understand what the normative value of return on sales is, you need to understand what it is. In accounting, this concept means an economic indicator, determining which you can find out the level of efficiency of use of certain resources at the enterprise. Moreover, not only tangible assets are taken into account, but also natural, labor resources, investments, capital, sales, etc. In simpler words, then by profitability they mean the level of profitability of a business, its economic efficiency and the benefits it brings.
Thus, it turns out that if the profitability indicator is below zero, then such a business is unprofitable, and you urgently need to raise this indicator, find out what influenced the occurrence of such a situation and eliminate the causes of the problem. The level of profitability is usually expressed in coefficients, but relative indicators are expressed for the profitability of sales in percent. The normative value can also indicate the efficiency of the operation of the enterprise’s resources; at normal values, the organization will not only cover costs, but also make a profit.
Profitability indicators
When calculating all indicators, it is very important to pay attention to such a concept as the profitability threshold. This indicator, or more precisely, the point, actually stands on the separation of the unprofitable and effective state of the company. It serves as a comparison with the breakeven point, reflecting at what point a loss-making business has become effective. To analyze the performance of the company, it is necessary to compare the actual profitability indicators with the planned ones. In addition, historical data and the performance of competitors are used in comparison. But the coefficients, or, as they are also called, sales indices, are determined by calculating the ratio of total income to fixed assets and flows.
The main groups of standards
The normative value of return on sales and profitability can be divided into certain groups, namely:
- Return on sales (profitability of the enterprise).
- Return on fixed assets.
- Return on current assets.
- Return on personal capital.
- Product Profitability.
- Profitability of production assets and the profitability of their use.
Using just these indicators, taking into account the scope of the company, you can determine its total profitability. To determine the profitability of assets, it is necessary to determine the efficiency of operating the company's own capital or its investment funds: it all depends on how the company's assets bring it profit, how much of it, taking into account the resources spent on production. To calculate the return on assets, the ratio of profit for a specific period of time to the size of the assets of the enterprise for the same period is used. The formula is as follows:
- R assets = P (profit) / A (size of assets).
The same indicators are used in the economy to calculate the profitability of operating production assets, investment and equity. For example, having calculated the return on equity of a joint-stock company, you can find out how effective the investments of shareholders in this industry are.
Profitability calculation
Return on sales (normative value) is an indicator of profitability, which is expressed in ratios and is a reflection of the share of income for each money equivalent spent. To calculate the company's sales profitability, the ratio of net profit to the size of the proceeds is calculated. Calculations are carried out according to the formula:
- R prod. = P (net income) / V (revenue).
This indicator is directly affected by the organization’s pricing policy, as well as its flexibility in the market segment where its products are involved. Many companies use various external and internal strategies to increase their own profits, as well as analyze the activities of competitors, the range of products they offer, and more. There are no clear schemes, norms, designations of profitability. This directly depends on the fact that the normative value of sales profitability is directly related to the specifics of the organization. All indicators can reflect only the overall performance of the company for a specific period.
Basic formulas
In order to effectively manage sales and monitor the effectiveness of the organization, profitability calculations are carried out. For this, it is customary to use certain indicators, namely: gross and operating EBIT profit, balance sheet data, net profitability of sales. The calculation of profit , taking into account the indicator of gross income, shows a coefficient indicating the share of growth from each money equivalent earned. To calculate this indicator, take the ratio of net income after tax has been paid to the total amount of funds for a specific period of the organization’s work. In other words, operating margin equals gross income divided by trading revenue.
It is worth noting that this ratio must be included in the financial statements. But operating profit EBIT is equal to the ratio of EBIT to total revenue. Moreover, this indicator reflects the total income before all interest and taxes are deducted from it. It is according to this formula that the operating profitability of sales, the normative value in production, and also other important values are calculated. It is believed that this ratio is between the general data on profit and net earnings of the organization.
Profitability ratios
But the profitability of sales on the balance sheet is a coefficient calculated on the basis of the accounting reports and is a characteristic of the share of profit from the organization’s total revenue. The calculation of this coefficient is carried out according to the formula for the ratio of total income or loss from product sales to revenue. To get the result, you just need to use ready-made data from the balance sheet of the enterprise.
The calculation of net sales profitability is carried out by means of the ratio of net profit after all payments to the total revenue. To make independent calculations of the normative value of sales profitability in trade, you need to find out how many products were sold and what income the organization received from this sale after it paid all taxes, taking into account other expenses related to operating activities, but without affecting non-operating expenses .
Results Analysis
Thanks to all these formulas, company specialists can calculate the most varied varieties of profit relative to the total number of revenue. But all the same, the dependence on the characteristics of the main direction of the enterprise remains quite significant. If the profitability of sales, the normative value and other ratios for several periods of the organization’s activity were calculated, then the company's employees will be able to make a qualitative economic analysis. That is, these indicators will help to conduct operational management of the economic activity of the enterprise. In addition, this will allow you to quickly respond to fluctuations and changes in the market, which will undoubtedly help to improve performance and provide the company with constant income.
Indicators reflecting the normative value of sales profitability are used in the calculation of operational activities. But you should not use them for long-term periods, since changes in the market occur quite often, and with such calculations you will not be able to respond to them in a timely manner. They will help solve daily and monthly tasks, helping to make plans for the sale of manufactured products.
Increase profitability
There are ways to increase the regulatory value of return on sales. Among them, the following are considered the most common: reduction of production costs by reducing the cost of production of goods and increasing the volume of manufactured goods, which will increase gross revenue. But in order to effectively use these methods, the organization must have enough labor and material resources. Again, for such events, you need to work with highly qualified employees or to increase the professionalism of your staff through various trainings and using new methods and practices of the global economy that improve the skills of employees.
To increase the normative value of sales profitability by net profit, it is important to study what positions the competitors of the organization are in, what their pricing policy is, whether promotions or other attractive events are held. And already having these data, it is possible to analyze what factors should be used to reduce the cost of production. Moreover, for analytical events, one should use not only data on competitors in the region, but also apply information on the leaders of this market segment.
Conclusion
To increase the profitability of sales, the normative value for industries should be calculated according to all the necessary formulas and an analysis of the data obtained. It is worth considering that increasing the efficiency of an enterprise is affected not only by its pricing policy, but also by the range that it can offer its customers.
Most often, the best solution to reduce the cost of production is the introduction of modern technologies in production. To understand whether this method will improve production, it is necessary to conduct an economic analysis and find out what costs are needed for this, how long it will take for the employees to master the new equipment, and after what period this investment will pay off.