This is a simple calculation that helps you to be able to compare the value of your sales year after year. Common sense dictates that your sales would increase at least a little bit each year due to inflation.

This ratio is especially beneficial because it is quite simple for a business owner to overlook increasing prices year to year to adjust for inflation and this ratio helps to show if that has been successfully managed.

Additionally, for a company that has been in business for multiple years, it is beneficial to apply this ratio to sales to compare sales this year to sales from several years ago, since the value of a dollar today would be quite materially different from that of a dollar say, 20 years ago.