When running any successful business an understanding of how to calculate sales ratios can be an essential function in analysing how the business is performing. All costs and expenses of the business can be converted into a ratio against the sales enabling the business to see where they can make cost effective savings or how they can increase production. To calculate the various ratios using sales is a simple task that can be done with a calculator and a set of accounts that could help increase profitability of the business.
- Skill level:
- Moderately Easy
Things you need
- Set of accounts
Calculate your net sales figure. This is done by taking your gross sales (the revenue earned by your business over a given period of time) and deducting your cost of sales (the costs directly related to your product). This figure can be found on your trading profit and loss statement. Example of a basic net sales calculation: Sales £156,000 Less Cost of Sales £ 47,700 Less Direct Wages £ 32,000 Equals Net Sales £ 76,300
Collate the various figures for what you want to calculate using the sales ratio, whether it is production costs, inventory levels including the stock you hold in reserve, staff costs or expenses and the cost of sales, this may include advertising and logistics costs.
Divide your chosen figure for analysis by the net sales. For example - rent expense divided by net sales, multiplied by 100 will give you the percentage ratio of rent to sales. Repeat the above step for each cost or expense you want to calculate. Another example would be for inventory level, you need to take the number of products sold over a given period be it a week, month or quarter and divide this by your stock holding levels, if you have sold 100 units of product over one month, and your stock level is 1000 then your stock turnover has been 10 % of you stock holding. Stock is a capital expense so you may be able to reduce stock holding and the money tied up in slow moving products. For a company with a large product range this can make a significant difference in working capital.
Tips and warnings
- Useful sales ratios include - accounts receivable turnover ratio, inventory turnover ratio, fixed asset turnover ratio and accounts payable turnover ratio.
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