Return on sales is the net income generated divided by total sales for the same time period, presented as a percentage. It helps identify factors causing loss, adjust production to meet demand, and reduce operating expenses. It’s important to calculate even for companies that don’t experience regular cycles of up and down sales.
Sometimes referred to as operating margin, operating profit margin, or operating profit margin, return on sales is the measure of net income generated divided by total sales for the same time period. This calculation is considered essential for understanding the true picture of what kind of financial gains the firm made during the period under review, and thus gaining a better understanding of the firm’s overall financial profitability. Return on sales, or ROS, is presented as a percentage rather than a real figure.
There are several reasons why a company would like to identify the return on sales associated with a particular time frame. One reason has to do with the manufacturing process itself. If sales are declining and earnings are negatively impacted, ROS can help identify factors that could cause the loss, allowing the company to adjust its operations to accommodate some changes in consumer tastes or demands. This can save the company money in more ways than one and therefore increase profits.
By calculating this operating profit margin on a monthly or even quarterly basis, changes can be identified and production adjusted sooner, thus avoiding the accumulation of finished products that need to be stored. Because taxes must be periodically paid on inventories, the ability to keep inventories of finished products, as well as raw materials, as low as possible is a major concern in many businesses. From this point of view, calculating the return on sales can actually help reduce overall operating expenses by not only preventing the purchase of unnecessary raw materials, but also by keeping the tax liability lower.
With businesses that are seasonal in nature, determining the return on sales that applies to certain times of the operating year can make it much easier to know when to adjust production to meet demand. This in turn allows you to order materials more efficiently, hire temporary employees during times when you need to ramp up production, and downsize materials and labor when a slow season is about to start. This helps keep the company financially viable and able to operate at the best level of profit for long periods of time.
Even with companies that don’t experience regular cycles of up and down sales, calculating return on sales is still important. The process can help identify changes in factors such as the cost of raw materials, an increase in utilities to operate manufacturing facilities, and any other factors that impact the company’s profitability. Quickly identifying these factors allows you to address and resolve issues before they have a chance to drastically affect the profits your business generates and thus maintain or even increase profits month-to-month.
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