Return on Sales

If a company's return on sales is increasing, this is a sign of steady and efficient growth. A declining return on sales, however, can indicate serious financial difficulties. Increasing revenue can help improve the return on sales, although this may require a revision of current strategies.

How to Calculate Return on Sales

Companies can calculate their return on sales by dividing operating profit – before deducting taxes and interest – by net revenue over a specific period.

An example: Suppose your software company generates 500,000 euros in revenue but has 425,000 euros in expenses. What is your operating profit? In this case, it is 75,000 euros.

Next, divide the profit by revenue to determine your return on sales > 0.15

Multiply this by 100 to convert it to a percentage, and you get 15%. That is indeed a healthy return on sales! Many companies aim for a return on sales of 5-10%.

Once a company has calculated its return on sales, it can determine how cost-effectively it offers its products on the market.

How to Use Return on Sales

Companies should aim to reduce costs and increase revenue through continuous improvements. If a company generates 40,000 euros in revenue but needs 36,000 euros to do so, its overall efficiency is much lower than it should be.

Companies that fail to achieve a satisfactory return on sales can work on reducing expenses while maintaining or increasing revenue without incurring additional costs. Alternatively, they can increase revenue while keeping cost increases moderate. It is important to find the right balance. The best approach is to create a liquidity plan using a cash flow software.