Running a business is no walk in the park. To make it big, you have to juggle a lot of tasks at once. It’s not just about mastering your industry and products; you also have to be savvy with your finances, including working with invoicing software. One critical factor that can make or break your business decisions and success is Return on Revenue (ROR).
ROR stands tall as a crucial financial metric that allows business owners to gauge their overall performance and financial health. Also known as operating profit margin, ROR quantifies the profit generated per every dollar of revenue.
Here’s a clear guide to understanding the importance of this metric and how to effectively apply it to your business.
What is ROR?
Return on Revenue (ROR) serves as a financial yardstick that reveals the percentage of profit generated from a business’s total revenue. It’s a handy tool for business owners to assess how efficiently they’re translating sales into actual profits.
Return on Revenue (ROR) is a critical financial metric that quantifies the portion of profit derived from a company’s total revenue. Revenue, commonly known as sales or net revenue, encompasses the monetary proceeds generated through the sale of goods and services and is the foremost entry on the income statement. It serves as the starting point from which all expenditures and outlays are deducted to ascertain a company’s profit or net income. In certain industries like retail, revenue may be referred to as net sales or net revenue, as it is adjusted for sales discounts and merchandise returns.
Net income signifies a company’s profit and is determined by subtracting various costs and expenses incurred in operating the business from the revenue. These deductions encompass expenses such as the cost of goods sold, which pertains to production costs, taxes, operating expenses, and overhead costs recognized as selling, general, and administrative expenses (SG&A). Net income is positioned at the bottom of the income statement and is commonly denoted as the “bottom line.”
Return on revenue unveils the proportion of revenue that ultimately translates into net income. Essentially, net income represents what remains after all costs have been subtracted from revenue. Return on revenue is expressed as a percentage of the total revenue that materialized as profit or the surplus left after accounting for all expenses and deductions. The formula for calculating return on revenue is detailed below.