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How does one determine the health of their business? One of the most valuable indicators is looking at your Return On Sales (ROS)! ROS is also commonly known by a multitude of different terms such as Operating Margin, Operating Profit Margin, Operating Income Margin or EBIT Margin. In those names, you can find clues on which numbers to pluck into your formula, such as ‘Operating Profit’ and ‘EBIT’!

The formula divides your operating profit over net sales. This efficiency ratio clearly depicts how much of your net sales are actually net profit. 

 

How to find the values

So, where can one find the Net Sales and Operating Profit values? 

 

1. Find ‘net sales’ in the income statement, keeping in mind that it can also be listed as ‘revenue’. Some companies report ‘net sales’ while others report ‘revenue’. To extract the net sales from revenue, minus credits and refunds paid to customers from the revenue. 

2. Find the operating profit. Remember, the operating profit is the amount of profit before deducting non-operating expenses, such as interest expenses or taxes. 

3. Divide the operating profit by net sales. It’s that simple!

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What does your ROS tell you?

ROS is especially useful because it allows comparisons between companies of different sizes, just make sure that these companies are from the same industry!

 

Let’s look at an example:

Pear&Co. has net sales amounting to $10 million and an operating profit of $4 million. On the other hand, we have mega-corporation Chip Mobile Inc. which is raking in $200 million and has an operating profit of $40 million. 

When investors are looking into which company to invest in, Chip Mobile Inc. may be more impressive based on operating profit alone. However, the ROS formula will tell them that Pear&Co.’s return on sales is double that of Chip Mobile. The higher the ratio, the more profitable you are!

As seen from the example above, ROS is one of the most tell-tale financial ratios on a company’s overall performance. If you want to see how efficiently a company generates profits from its top-line revenue, this efficiency ratio is the answer! 

Creditors also need this information as they need to know if the company that they are investing in can pay back loans. Investors also want to look into reinvestment potential and dividends.

Consider another situation where one business creates $18 million in net sales but needs $15 million in resources to do so. If another business can achieve the same result with $9 million in resources, they are more adept at reducing costs. They will have a greater return on sales ratio, making them more profitable and appealing to potential investors.

 

What would you like your ROS to look like?

Want to know what your business’ ideal ROS should look like? Take a look at the following factors: 

 

• Industry Benchmarks

Looking at the benchmarks in your industry can give you a rough idea of what you want your ROS to amount to. If the industry average is 10%, a 12% ROS is substantially good.

• Competitors

Since you and your competitors are competing in the same environment, their ROS percentages are a good place to pin your target ROS at (or higher!). Your labour and material costs should be similar since you are in the same line of business. You wouldn’t want to be paying more for your materials than your competitors are. Strive to stand out from your competition by showing higher profitability.

 

How to increase your company’s ROS

 

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To increase your level of profitability, we can tinker with the variables in the ROS formula. Look into your sales or operating costs and see which aspects can be adjusted, such as decreasing operating expenses or increasing overall revenue.  

 

• Decrease cost of labour

Methods to decrease labour costs can include investing in machinery or company training. This can decrease the cost of labour long term because employees will be able to work more efficiently. 

 

• Decrease cost of materials

Survey the prices other suppliers charge or negotiate with your current supplier for lower prices. Excess material can be used or repurposed in production to help save costs and prevent wastage.

 

• Increase revenue

Revenue can be increased through various sales promotions to increase the volume of purchases. The company can consider giving rewards or discounts. Sponsored posts on social media are also an effective way to help your product reach your target audience without having to break the bank with an extensive advertising campaign budget.

 

• Work with SalesWorks

SalesWorks has been in the industry for over 25 years and has established itself as the go-to sales and face-to-face marketing expert in more than 8 Southeast Asian markets. 

 

By outsourcing your sales to us, you can reduce your fixed costs and benefit from our brand promises, which include risk-free acquisition, a guaranteed ROI and brand enhancement. Let us help you increase your profitability today? Contact us to get started!