Revenue
The amount of profit depends on its changes. If revenue increases and expenses do not increase, profitability increases. When revenue falls and expenses remain the same, profitability decreases. First, to calculate sales profitability, revenue is determined using the formula:
Revenue = Expenses + Profit
An enterprise can produce a product, sell goods, have revenue, but not have a profit.
Let's look at an example: Nikolay owns a flower shop. In a month, he sold 20 arrangements and earned 100,000 rubles. At the same time, he paid 140,000 rubles for rent, advertising, salaries, taxes, and purchasing goods during the same time. As a result, the store had revenue, but no profit. On the contrary, the loss was 40,000 rubles. Therefore, it is important to use the revenue calculation formula to determine the profitability of sales profit.
Expenses
Profitability is directly related to the rate of growth of expenses. If they increase faster than revenue, profitability falls. Expenses are divided into three groups:
Production . These include materials and raw materials, wages for workers engaged in production, logistics costs, payment for communications, utilities and rent of production facilities.
Administrative . These are expenses for software, salaries of administration staff, payment of payroll taxes, services of financial organizations, expert consultations, purchase of office supplies.
Commercial . These include development costs (advertising) and other services required to promote the product, and the sales department payroll.
If you just count the total expenses, it is quite difficult to understand why profitability changes. Therefore, expenses are recorded by groups with subsequent analysis of the results. This makes it possible to find the reasons for the change in profitability and make the necessary decisions.
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Formula for calculating sales profitability based on net profit
To use the formula for calculating the sales profitability ratio by balance sheet lines, you need to know specific data from the financial report and balance sheet:
revenue;
gross profit or loss;
cost of sales;
profit from sales or loss;
interest payable;
income tax;
profit before taxes or loss.
Most often, the formula for calculating net profit is used to find the return on sales as a percentage:
RP = NP (net profit) / revenue * 100%
That is, before calculating the percentage of sales profitability using the formula, you need to determine the net profit and revenue. This is done as follows:
PP = B + PD - S - UZ - PR - N
Where:
B — revenue.
PD - other income.
C — cost price.
MC – management and commercial costs.
PR - other expenses.
H — taxes for the billing period.
Revenue is calculated as follows:
B = C * OB
Where:
C is the price per unit of production.
OP - sales volume for the required period.
This formula for calculating the return on sales based on net profit is used in companies operating in various fields, including those producing goods or offering various services.
Disadvantages of the Net Profit Return on Sales Formula
The general formula for determining profitability only tells us whether the company is operating efficiently or not, but does not show which segments of the business have problems.
Let's say a company calculated profitability for two years, and the analysis yielded the following data: in 2022, the company's profit was $2.24 million, and in 2023, the profit was $2.62 million. In 2022, net profit was $594 thousand, and in 2023, it was $516 thousand. Let's see how profitability has changed:
The profitability ratio for 2022 was: ROS (2022) = 594 / 2240 = 0.2205 (22%).
The profitability ratio for 2023 was: ROS (2023) = 516 / 2620 = 0.1947 (19.5%).
Thus, the change in sales profitability was: ROS = ROS (2023) - ROS (2022) = 22 - 19.5 = - 2.5%.
Thus, using the formula for calculating the return on sales, we