Formula of profit from sales: calculate correctly

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

One of the most significant economic indicators of the effective operation of an enterprise is profit. It is this value, the dynamics of its correlation with other key coefficients, that makes it possible for an economist to analyze the effectiveness of an enterprise development strategy. Profit makes it possible to invest in expanding production, improve product quality, provide workers with a package of social benefits and much more.

The management of an enterprise should strive to obtain the maximum benefit. This article will tell you about the formula for profit from sales, the factors that affect it.

The essence of the indicator

Profit of enterprises in a broad sense is an economic category, which is a monetary expression of the benefits received by an organization.

However, for the possibility of a comprehensive economic analysis, the following types are distinguishedof this indicator:

1. Gross.
2. Profit from sales.
3. Profit from non-realizable operations.
4. Balance.
5. Taxable.
6. Clean.

It should be noted that each organization, depending on the goals that are set for economic analysis, may accept other forms of profit.

Concept

Factor analysis at enterprises is usually subjected to sales profit as the most informative indicator. It is included in the gross and differs from it by the amount of costs for the sale of goods (sales expenses) and management deductions. Profit from sales is not only an economic indicator of trade enterprises, as an ignorant layman might think, based on the name of the indicator. Manufacturing organizations also face the concept of sales - they sell manufactured products.

Why is it most often analyzed profit from sales, and not gross or balance sheet, for example? When taking into account the total gross revenue, its value includes expenses incurred by the enterprise for production (variable costs), sales of products (commercial deductions), as well as to ensure the life of the enterprise itself (fixed costs). Only by clearing the profit from losses, you can get data for the most objective analysis.

It is also necessary to understand which list of key factors can affect the amount of revenue received as a result. The first step towards factor analysis will be to specify the formula for profit fromsales. After all, the final value depends on the components of the indicator. It is worth noting that the sales profit formula used by the economic departments of different enterprises may differ depending on the accounting policy of the enterprise. More about calculations in the next section.

Profit formula

How is this indicator calculated?

In most cases, the calculation formula for calculating sales profit is:

PP=PV– RC, where PP is sales profit, PV is gross profit, RC is commercial expenses (all costs associated with sales, for example, delivery, advertising).

In the presented sales profit formula, one of the values, in turn, is also calculated. This is gross income. It is calculated by the formula:

PV=VP - PS, where V - sales revenue, PS - production cost.

Deepening further, you can decompose the production cost into components:

PS=PerR + PostR, where PerR - variable costs, PostR - fixed costs.

Given the above, you can get a more advanced sales profit formula that takes into account all the components of this indicator:

PP=VP - (PerR + PostR) - CR

As you can see from the formula, sales revenue is influenced by many economic values, it is the result of several areas of the organization, which once again confirms the importance of this economic value.

The concept of return on sales profits

Revenue in both economic and managerialaccounting is expressed as an absolute value, usually in thousands of rubles. For businesses with different sales volumes, the same amount of sales revenue can be both bad and good.

A separate concept has been introduced to compare the economic indicator and the volume of revenue.

Return on sales profit is a value that shows what share the indicator in question occupies in total revenue. Most often it is a percentage.

Return on Sales Profit: Calculation Formula

The formula for calculating the profitability of profit from sales is entirely based on the definition of the indicator:

RPP=RP/VP (%), where RP - profit margin on sales, RP - profit on sales, VP - sales revenue.

ROA of 8-10 percent is considered normal. However, everyone is individual.

Example of applying sales profit and sales margin formulas

The table below schematically shows the economic results of Vegas LLC.

Proceeds from sales, calculated as the product of the price of goods by the quantity sold, amounted to 1,000,000 rubles. Variable costs - in the amount of 650 thousand rubles. Permanent - 190 thousand rubles. Implementation costs amounted to 50 thousand rubles.

The formula for calculating sales profit is described above. Substituting the given values results in the following:

PP=1000 - (650 + 190) - 50=110 (thousand rubles)

BIn absolute terms, the revenue of Vegas LLC amounted to 110 thousand rubles.

Calculation of profit margin on sales:

RPP=110/1000100%=11%

The last calculation shows that the share of profit from sales in revenue was 11 percent, this indicator fits into the standard value.

Analysis

The sales profit formula itself gives a clear idea of what factors affect this value.

Increase in income will occur if the number of transactions increases. Even if in this case variable costs increase proportionally (which is economically logical), it can be assumed that fixed costs will not increase, respectively, profit will increase. If the company's management manages to reduce selling and fixed costs, revenue will also increase.

Managing an enterprise is a huge responsibility. It is management that plays the most important role and determines the course of development. Proper profit management is one of the most important aspects of successful organization management.