Two Sales Measurements

Sales, sales, sales! We need more sales is the common cry. But stop and ask if you are getting those sales efficiently. Here are a couple of financial measurements.

Advertising Results

There are numerous measures of advertising results, but here I want to focus on advertising to sales. Advertising to sales in calculated as:

Advertising to Sales = Advertising Expense / Sales

This is expressed as a percentage. Sounds simple enough, doesn’t it? But what is this telling you? Basically this is an indicator as to whether you are getting the sales you expected to get from your expenditures on advertising. Obviously no company wants to spend on advertising without seeing tangible results in sales. The one exception may be in the area of creating brand awareness, but even then the long-term goal is to increase sales. But let me suggest another thing to consider when using the advertising to sales percentage calculation.

It is helpful if the calculation is broken down a little finer to see the impact of advertising on particular products or product groups. This is relevant as not all products are equally profitable. Consider the following table:
advertising to salesObviously it is unlikely that you would have the same sales and advertising for four different products, but this is to demonstrate how the advertising to sales percentage can be misleading. Note that for all four products the advertising is 10% of the sales for the product. However, you will also notice that each product yields a different gross profit, and as a result the advertising as a percentage of gross profit is lowest for Product B at 15% of sales, yet rises to 40% of sales for Product D. This demonstrates why it is important to measure the advertising to sales percentage on a product level or product group basis if possible. This will yield a more meaningful statistic.

Rent to Sales

The rent to sales calculation determines the rent as a percentage of the sales. It is calculated as follows:

Rent to Sales = Rent / Sales

You could say that this is an attempt to determine if a particular location is efficient in its operations; that is that it returns sufficient sales in relation to the rent being paid. If the percentage is too high, then it could mean another location needs to be considered or perhaps a particular location is not pulling its weight and should be closed. This is similar to the commonly used retail calculation of sales per square foot. The higher the sales per square foot, the better the performance.

Just like the advertising to sales calculation, it may be necessary to dig a little deeper into the rent to sales calculation to see if you are really seeing the whole picture. It could be that a particular location serves more of a support role for other locations, so the raw calculation could be misleading.

Do you have clarity on whether your sales numbers justify your rent expenses? If not, perhaps it’s time to make this calculation.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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