Return on Sales (ROS)

CONTENTS

What is Return On Sales (ROS)
How to Calculate Return on Sales
How to Use Return on Sales

What is Return On Sales (ROS)

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Definition Return On Sales (ROS)

The Return on Sales (ROS) is a percentage measure, used to indicate how efficiently a business transforms sales into profits, e.g. the amount of profit generated per dollar earned.

If a company’s ROS is on the rise, this signals growth at a steady efficient rate. Diminishing ROS, however, may indicate serious financial difficulties. Increasing sales can help improve Return on Sales, though this could require an overhaul of current strategies.

How to Calculate Return on Sales

Companies can calculate their Return on Sales by dividing the operating profit — before taxes and interest are deducted — by the net sales, across a chosen period.

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For example: let’s say your software company makes $900,000 in sales but incurs $725,000 in expenses. What is your operating profit? In this case, it’s $175,000.

Next, you divide the profit by the sales figure to get your ROS. 0.194.

Multiply this by 100 to convert this figure to a percentage, and you have 19%. A very healthy ROS indeed! Many organizations would be content with a 5-10% Return on Sales.

Once a business has calculated its ROS, it can determine how cost-effective it is in delivering products to the market.

How to Use Return on Sales

Companies should aim to reduce costs and boost revenue through continuous improvement. If a business earns $50,000 in sales but takes $35,000 to do so, its overall efficiency is much lower than it should be.

For businesses failing to hit a satisfactory ROS, managers can work on reducing expenses while keeping revenue the same or taking it higher without incurring further costs. Alternatively, they can boost sales at the same time as moderately increasing costs as required.

Finding a comfortable balance is key.

General FAQ

How to calculate return on sales?

A business can calculate its Return on Sales by dividing its pre-tax, pre-interest operating profit by its net sales within the relevant period of time. The next step is to divide the profit by the sales figure and multiply the result by 100, which gives you an accurate percentage. This tells you how cost-effectively your business is bringing products to customers.

How to improve the return on sales?

Businesses have multiple options for improving their Return on Sales. One method is increasing the product price, so long as this doesn’t leave your rates far higher than your competitors’ (therefore pricing yourself out of the market entirely!). Raising prices can be effective if your brand delivers a stronger customer experience, or warranty on products, than other rivals. Another option is to source materials at a lower rate, either by negotiating with your current suppliers or finding a cheaper alternative. You may be able to get a discount if you start buying materials in greater quantities, provided this won’t have a detrimental effect on revenue. Finally, companies can try to improve their Return on Sales by assessing how they manufacture or distribute products. For example, moving production abroad may lead to long-term savings, creating a greater return.

How to find marketing return on sales?

Businesses can find marketing Return on Sales in a number of ways. One option is to subtract the marketing cost from the sales growth and divide the result by the marketing cost. But this approach works on the assumption that the total sales growth is a direct result of a marketing campaign. That’s why you may choose to subtract the average organic sales growth from the sales growth and subtract the marketing cost from this instead. Next, divide the result by the marketing cost to arrive at the Return on Sales.

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