Normative value of return on sales by industry

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

Calculation of the standard value of return on sales for industrial enterprises and other organizations is extremely important in the management of the company. Knowing these indicators, it is possible to conduct a qualitative economic analysis and improve the efficiency of the enterprise. If a company wants to maintain its position in the market or even improve it, then it is very important to carry out such calculations for short periods. This will allow not only to better manage the organization, but will also provide an opportunity to respond in a timely manner to any changes in the market.

Basic concepts

Before you understand what the standard value of return on sales is, you need to understand what it is. In accounting, this concept means an economic indicator, by determining which you can find out the level of efficiency in the use of certain resources in an enterprise. Moreover, not only tangible assets are taken into account, but also natural, labor resources, investments, capital, sales, and so on. In simpler terms, profitability means the levelbusiness profitability, 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 it is urgent to increase 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 as a percentage. The normative value can also indicate the efficiency of the enterprise's resources, with 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 division of the unprofitable and effective state of the company. It serves as a comparison with the break-even point, reflecting at what point a loss-making business became efficient. To analyze the performance of the company, it is necessary to compare the actual profitability with the planned ones. In addition, the comparison uses data for past periods and the performance of competitors' companies. But the coefficients, or, as they are also called, sales indices, are determined by calculating the ratio of total income to basic assets and flows.

Main groups of standards

The normative value of return on sales and profitability can bedivided 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 profitability of their use.

Using precisely these indicators, taking into account the scope of the company, you can determine its total profitability. To determine the return on 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 profit to it, 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 company's assets for the same period is used. The formula looks like this:

R assets=P (profit) / A (assets)

The same indicators are used in the economy to calculate the profitability of the operation of production assets, investments and equity. For example, by calculating the return on equity of a joint-stock company, you can find out how effective shareholders' investments in this industry are.

Calculation of profitability

Return on sales (standard value) is an indicator of profitability, which is expressed in coefficients and represents the share of income for each cash equivalent spent. To calculate the profitability of a company's salesthe ratio of net profit to the amount of 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 pricing policy of the organization, as well as its flexibility in the market segment where its products are involved. Many firms 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 so on. There are no clear schemes, norms, designations of profitability. This directly depends on the fact that the normative value of return on sales is directly related to the specifics of the organization's activities. All indicators can only reflect the overall performance of the company for a specific period.

Basic formulas

To effectively manage sales and monitor the performance of the organization, the company's profitability is calculated. To do this, it is customary to use certain indicators, namely: gross and operating EBIT profit, balance sheet data, net return on sales. The calculation of profit, taking into account the indicator of gross income, shows a coefficient denoting the share of growth from each earned cash equivalent. To calculate this indicator, they take the ratio of net income after the payment of tax levies to the total amount of funds for a specific period of the organization's operation. In other words, operating margin is equal to gross income divided bytrading 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. However, this indicator reflects the total income before all interest and taxes are deducted from it. It is this formula that calculates the operating profitability of sales, the standard value in production, as well as other important values. It is believed that this ratio is between the general data on profit and the net earnings of the organization.

Profit ratios

But the profitability of sales on the balance sheet is a coefficient, the calculation of which is carried out on the basis of data from accounting reports and is a characteristic of the share of profit from the total revenue of the organization. The calculation of this coefficient is carried out according to the formula of the ratio of the total income or loss from the sale of products to the volume of revenue. To get the result, you just need to use ready-made data from the company's balance sheet.

Calculation of net profitability of sales is carried out by the ratio of net profit after all payments to the total revenue. To carry out independent calculations of the normative value of the profitability of sales 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 otherexpenses related to operating activities, but without affecting non-operating expenses.

Analysis of results

Thanks to all these formulas, the company's specialists can calculate a wide variety of profits relative to the total revenue. But still, the dependence on the features of the main direction of the enterprise remains quite significant. If the profitability of sales, the standard value and other coefficients for several periods of the organization's activity were calculated, then the employees of the enterprise 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 a steady income.

Indicators reflecting the standard value of return on sales are used in the calculations of operational activities. But it is not worth using them for long-term periods, since changes in the market occur quite often, and with such calculations it will not be possible to respond to them in a timely manner. They will help you solve daily and monthly tasks, helping you plan for the sale of your products.

Increased profitability

There are ways to increase the standard value of return on sales. Among them, the most common are the following:the cost of production by reducing the cost of producing goods and increasing the volume of goods produced, which will increase gross revenue. But in order to effectively use these methods, the organization must have enough labor and material resources. Again, to hold such events, you need to work with highly qualified employees or increase the level of professionalism of your staff through various trainings and using new methods and practices of the global economy that improve the skills of workers.

In order to increase the standard value of return on sales in terms of net profit, it is important to study what positions the organization's competitors are in, what their pricing policy is, whether promotions or other enticing events are held. And already having this data, it is possible to carry out an analysis of which factors it is advisable to use to reduce the cost of production. Moreover, for analytical activities, one should use not only data on competitors in the region, but also use information about the leaders of this market segment.

Conclusion

To increase the profitability of sales, the normative value by industry should be calculated using all the necessary formulas and an analysis of the data obtained should be carried out. It should be borne in mind that the increase in the efficiency of an enterprise is influenced not only by its pricing policy, but also by the assortment that it can offer its consumers.

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 imperative to conduct an economic analysis and find out what costs are needed for this, how long it will take employees to master new equipment, and how long this investment will pay off.