Sometimes referred to as an operating margin, operating profit margin, or operating income margin, the return on sales is the measure of net profit generated divided by the total sales for the same time period. This calculation is considered essential to understand the true picture of what type of financial gains the business made during the period under consideration, and thus obtain a better grasp of the overall financial viability of the company. The return on sales, or ROS, is presented as a percentage rather than an actual figure.
There are several reasons why a business would want to identify the return on sales associated with a given time frame. One reason has to do with the production process itself. If sales are down and profits are negatively impacted, the ROS can help identify factors that may be causing the loss, allowing the company to adjust its operations to meet some change in consumer tastes or demands. This can save the company money in more than one way and thus increase the bottom line.
By calculating this operating profit margin on a monthly or even quarterly basis, it is possible to identify changes and adjust production sooner, thus preventing the accumulation of finished goods that must be warehoused. Since taxes must be periodically paid on inventories, the ability to keep finished goods inventories, as well as raw materials inventories, as low as possible is a major concern in many companies. From this perspective, calculating the return on sales can actually help lower the overall operational expense by not only preventing the purchase of unnecessary raw materials, but also keep the tax debt lower.
With businesses that are seasonal in nature, determining the return on sales that applies to given periods in the operational year can make it much easier to know when to adjust production to suit demand. This in turn makes it possible to order materials more efficiently, engage temporary employees during periods when it is necessary to increase output, and to scale back on materials and manpower when a slow season is about to commence. Doing so helps to keep the company financially viable, and able to operate at the best level of profit over extended periods of time.
Even with companies that do not experience regular cycles of upward and downward movements on sales, calculating the return on sales is still important. The process can make it possible to identify changes in factors such as the cost of raw materials, an increase in utilities to operate production facilities, and any other factor that has an impact on the profitability of the company. Identifying these factors quickly makes it possible to address and resolve the issues before they have the chance to drastically impact the profits generated by the business, and thus maintain or even grow profits from one month to the next.
