What is the return on sales to the CFO?

Just producing products is not enough forprofit. Obviously, it must be sold. The process of selling (selling) can be hardly more difficult than production, but its importance is difficult to overestimate. Obviously, the effectiveness of the implementation process requires close attention. Like many other aspects of the functioning of the enterprise, sales activity can be estimated using the profitability indicator. In this case, the indicator, which is called the profitability of sales, makes sense.

This ratio shows how muchrevenue takes profit. If information is available, the calculation of the indicator can be made both for the enterprise as a whole and for individual products. The total profitability of sales is, based on the foregoing, the ratio of profit to the amount of revenue received. The indicator of revenue is always the same, with him there are almost no problems. But with the profit indicator, the situation is much more complicated, since it can be determined in a huge number of ways, taking into account some factors and not taking into account others. Let us dwell on this point in more detail.

Many profitability indicators are calculatedbased on net profit. In this case, you can go the same way and use this value. The profitability of sales calculated in this way shows the share of profit taking into account the influence of the greatest number of factors. These include price policy, cost management policy, taxation peculiarities, payment for borrowed capital and some others. The problem with this calculation is that net profit depends on factors that are not related to the production and sale of products, that is, from other revenues and expenses. In addition, accounting of taxes and payment for borrowed capital does not allow comparing the calculated indicator with the levels of other firms in the event that they are taxed otherwise or have a different capital structure.

The above can be taken into account by usingprofit before tax or the indicator of profit from sales. When calculating based on profit before taxation, the profitability of sales shows the efficiency of production and sales under the influence of all factors except for taxation and allows you to compare organizations with different tax status. However, in this case, the profit is still influenced by other activities of the firm, which somewhat distorts information about the main production. With significant indicators for other activities, it is advisable to calculate the profit from sales. Without taking into account taxation and other activities, the profitability of sales shows the effectiveness of the activity only taking into account the price policy and the cost policy. With the help of the coefficient calculated in this way, it is easiest to compare different enterprises, since only the most significant factors are taken into account.

As you could already understand, one of the most commonThe methods of analysis used are the comparison of the performance of one enterprise with similar coefficients determined for other firms. In addition to such comparisons, comparisons can be made with industry average values. However, most often horizontal analysis is used, which consists of comparing the indicators of one enterprise for several periods. Determine the changes in indicators and identify trends that allow you to judge the effectiveness of any given management decisions.

It should be noted that almost all indicatorsprofitability are in close interrelations and affect each other. So, the profitability of sales has a particularly strong impact on the efficiency of use (profitability) of equity capital, as well as assets. The level of this influence can be assessed using a special kind of research called factor analysis.