The DriveSales™ | How to calculate your return on sales ratio: formula, definition and more!
It is very important to monitor the well-being of your business, as well as sales, and the best way to go about it is by determining your business’s return on sales ratio (ROS).
Return on Sales is defined as a ratio that is generally used to compute exactly how much is a business’s overall revenue that accounts for the actual profit with respect to the amount that is used for the operational costs.
This term is commonly used in the business world and holds a lot of significance and credibility to it. Investors and business partners find the return on sales extremely impact because it highlights the percentage of the profit that an organization makes on its gross revenue over a period of time.
Hence, ROS is typically used to determine the current growth and performance of a business amongst its past trends as well as other competitors in a similar sector or industry.
In simple terms, ROS is nothing but a performance determining tool for testing your business’s logic, growth patterns, and strategies.
It is a simple calculation of the profit of your total revenue to that of the operational costs.
An increase in ROS means that your business is profitable and growing and a decrease in ROS indicates financial turbulence's. Thus, you want to keep your return on sales ratio high at all times.
Formula to calculate return on sales ratio
Now that you understand what exactly return on sales ratio is, it is imperative that you know the way of calculating it.
There is a set formula for calculating ROS, i.e., divide your business’s operational profit by the net sales or net revenue. This result will provide you with your ROS ratio for your venture.
ROS = Operational Profit/Net Sales/Total Revenue
ROS = Return on sales
Operational profit = total profit on the revenue before interest
Net sales = total revenue without the credits or refunds
Steps to calculate return on sales ratio
1) Get the net sales of your business from the revenue or income statements.
2) Get the operational profit of your business from the revenue or income statements. Be mindful that you don’t include any of the non-operational expenses such as taxes.
3) Divide your operational profit by the net sales.
For example, suppose your business made $500,000 as its total sales and the business expenditure came around to be $400,000 for a particular quarter.
Thus, the operational profit came out to be $100,000. To calculate the ROS, divide the profit ($100,000) by your total revenue ($500,000). This results in a ROS of 0.2.
Hence, you make 20 cents as profit for every dollar that is earned in the sales by your business.
As ROS is usually determined in terms of percentage, you need to multiply your final result by 100. This will give you the percentage ROS. In the above example, The ROS comes around to be 20%.
Importance of return on sales metric
Return on sales is one of the major tools to determine the strength and health of your business. Undoubtedly, it provides an accurate picture of your venture’s monetary strength. It helps in making your business more credible and reliable. Mostly, investors and potential target clients are more interested in return on sales as it helps to build trust in your business idea and strategy.
A higher ROS showcases that you are capable of paying back your loans, potential dividends, and all other business expenses.
In the business world, fluctuation is a very commonly used term. This means that nothing is stagnant and your business revenue and expenses can fluctuate over a period of time. Thus, using gross revenue to determine the company’s profitability might not be ideal.
Hence, ROS plays a very important part here.
How to use return on sales ratio?
There are a couple of ways in which the regular reviewing of your business’s ROS can help you to improve your business strategy. A few of them are:
1) Hike in revenue — One of the most efficient and probable ways to increase your revenue is to hike up the sales. There are a number of ways to achieve this, such as sales promotion, rewards, interesting schemes, etc.
2) Effective use of technology — In the present techno-savvy business world, it is important to leverage the trending technologies to make your business management and scaling more smooth and efficient. One such most common example is Customer Relationship Management (CRM). This helps the sales team to ensure that the clients and customers are happy with your services.
3) Reduce the labor cost — Instead of hiring employees dramatically to meet the ever-growing new trends, invest in getting value employees and training them according to your business demands. This will help you to manage and eventually reduce your labor costs.
Now, as an effective SALESPERSON! We can do three things from here.
1. Not ignoring the opportunity and blaming the situation for revenue loss.
2. Taking important notes and going back to revisit your sales strategy with the growth mindset.
3. Reaching out to The DriveSales™ if you need any specialized help for sales.
To conclude, what you choose to think also provides some idea of your development as a consultative salesperson. It is something like Tony Robbins quotes “Setting goals is the first step in turning the invisible into the visible.”