Profits to Sales : The Golden Ratio (2024)

FAQs

Profits to Sales : The Golden Ratio? ›

The Golden Ratio of Profits to Sales is often cited as being around 20%, meaning that a company should aim to achieve a profit margin of 20% or higher in order to be considered highly profitable. However, this ratio can vary depending on the industry and the size of the company.

As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.

The formula for calculating the return on sales ratio consists of dividing operating profit by sales. In order to express the ratio as a percentage, the calculated amount must then be multiplied by 100.

The Golden Ratio is about how to stay competitive and futureproof in our businesses and careers. The ideal ratio is also referred to as 70-20-10. There is an excellent summary article in Harvard Business Review titled Managing Your Innovation Portfolio.

Use the golden ratio to calculate an initial base price by multiplying the cost of the product or service by Phi (1.618). This will give you the correct prices for each segment.

On the face of it, a gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers and other producers of goods.

In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.

The Golden Ratio for Marketing and Sales ROI is 5:1

For every dollar that you spend on marketing and sales, you should get $5 back in return. Now that's considered the middle of the curve, so that's considered average.

The Golden Ratio is 1: 1.618, and the full equation states that when a line is divided into two parts in a ratio of 1: 1.618, it creates the ideal proportion. The Golden Ratio has its roots in nature, from plants to snail shells, and has been used as a guide for architects and artists across the world for centuries.

The golden ratio is an irrational number that approximately equals 1.618. For artistically-minded people, the ratio—or better yet, the divine proportion—might be easier to understand visually. This is easiest to demonstrate with the golden spiral, which is often depicted and constructed within a rectangular frame.

What did Fibonacci say about the golden ratio? ›

The Golden Ratio is a relationship between two numbers that are next to each other in the Fibonacci sequence. When you divide the larger one by the smaller one, the answer is something close to Phi. The further you go along the Fibonacci Sequence, the closer the answers get to Phi.

The golden ratio, also known as the golden number, golden proportion, or the divine proportion, is a ratio between two numbers that equals approximately 1.618. Usually written as the Greek letter phi, it is strongly associated with the Fibonacci sequence, a series of numbers wherein each number is added to the last.

The 40% rule is a widely used benchmark for assessing a startup's financial health and the balance between growth and profitability. This rule of thumb emphasizes that a company's growth rate and profit, typically represented by the operating profit margin, should collectively reach 40%.

But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.

A good margin will vary considerably by industry, but as a rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these guidelines vary widely by industry and company size, and can be impacted by a variety of other factors.

Typically, an operating profit ratio of about 20% is considered good, and below 5% is considered low.