Sales Volume Analysis

Your sales are rising but your profits aren’t, even though you’ve been controlling your overhead costs. Your accountant tells you it’s possible to decrease your sales and increase profits. A bit of number crunching can explain why. Both of these scenarios require an analysis of your sales volumes to determine how you’re generating revenue and expenses.

Sales Volume

  1. Many business owners use the terms “sales,” “revenues” and “income” interchangeably, but they each have separate meanings. In some instances, “sales” refers to the number of units of a product or service you sell, rather than the money you receive from selling them. Tracking your sales by volume, or number of units sold, can help you identify what is affecting your revenues, expenses and profits.

Types of Sales

  1. One of the first steps in analyzing your sales volume is to differentiate among the different types of sales you have. Start by counting the number of units of each different product you sell, rather than your total sales. Next, calculate how many units and how much of your sales revenue comes from each different distribution channel you use. For example, if you sell shoes, determine how many you sell in retail stores, how many you sell online and how many you sell in print catalogs. If you analyze your volumes by customer demographic, you might find that older women are buying most of your product. Other factors to evaluate include sales volumes by geographic territory, sales rep and price.

Profit Margin Analysis

  1. Once you know how many units you’re selling and where you’re selling them, sort your sales volumes by profit margin. This will require that you work with an accountant to accurately determine your production and overhead expenses. Production expenses relate to making your product, while overhead costs refer to running your business and selling your product. You might find that your largest-selling item produces the lowest profit margin and that you might be better off dropping it and using that money to concentrate on making and selling products with higher margins. Alternately, you might look for ways to make and sell this product cheaper. This might include using different materials or choosing distribution channels. Evaluate your sales volumes by gross profits. You might find that your products with the lowest margins have such high sales, they generate the biggest gross profit for you.

Cost of Goods Sold

  1. In addition to production and overhead costs, businesses determine their cost of goods sold to learn the total costs to sell a product that are not related to administrative overhead. For example, administrative overhead such as rent, insurance and office supplies don’t change with your sales volumes. Costs of goods sold such as marketing, sales rep salaries, wholesaler commissions, materials to make your product and manufacturing labor all relate directly to making and selling your product. Knowing the total cost of the goods you sell help you better target cost-reductions if you can’t trim administrative overhead. You might find that selling another 1,000 units of your product might require expenses such as a second shift, more delivery runs, extra commissions or additional marketing that don’t justify selling these extra 1,000 units.

Break Even

  1. Knowing your overhead and production expenses and costs of goods sold helps you determine at what sales volume each product breaks even. Knowing your break-even point can help you determine whether to launch a new product, when to drop one and the effect of your sales beyond break-even on your profits and taxes. This can help you better set pricing strategies.