The price to sales ratio is a marginal valuation ratio at best. It is really an offshoot of an antiquated concept of valuing a business. In the past, one of the more common methods to value a business deal was to use a multiplier of sales. The price to sales ratio used with business ratios is similar. Simply stated, the price to sales ratio is the entire market value of the company (the price) as a function of revenue (sales).
Sales is a term commonly substituted for revenue. However, sales are sub element of revenue. Gross sales are total customer purchases and net sales include adjustments to those sales. Adjustments include returns, allowances and discounts.
Historically the only two forms of payment were either cash or check. Then credit card payments became very popular in the eighties and today the preferred method is debit. Debit payments are an instantaneous removal of value from the customer’s account and suspended by the banking system until deposited into the business checking account.
In business the best source of new business is the existing customer. Discovering the customer’s habits and characteristics allows the sales department to expand into new geographical territories with similar customer characteristics and/or modify the existing product lines. The key to success is gathering the proper information at the point of sale.
The scholarly definition and reality are two different perspectives. The student is taught that marginal revenue equals the additional dollars generated for an additional single unit of sales. It is literally taken right down to the micro measurement. This is simple to understand but in small business, the scope of its meaning and impact are substantial to the bottom line.
Sales are a component of revenue. Revenue encompasses several sources of income including sales. Other sources of revenue include interest, trust monies, royalties, and fees. In effect, revenue includes all sources of income, realized and unrealized. Sales are divided into two levels, gross sales are all sales at the regular price; net sales are gross sales less discounts or adjustments associated with that particular product(s).