Understanding how to calculate revenue growth gives you insight into one of the many metrics you should track to measure your business success.
Calculating revenue growth is crucial because it gives you a sense of how your business performs over time. It’s also helpful when comparing your company with others in the same industry and can be an early indicator of positive (or negative) sales trends. It can also help you determine if you need additional momentum to increase the number of customers.
Further, estimating revenue growth for your business can be an excellent way to get a handle on how profitable you are.
Here is everything you need to know about how to calculate revenue growth.
What is Revenue Growth?
Revenue growth is one of many financial metrics used to measure the health of a company. Calculating a company’s revenue growth shows how much money it brought in during a particular period — usually one year — compared to another.
Because top-line revenue drives profitability, monitoring revenue helps investors determine whether their investment is growing or not. Still, it also allows businesses to compare their performance against competitors and evaluate their performance over time.
Why is Understanding Revenue Growth Important?
Understanding revenue growth is essential to any business owner because it shows the business’s health. With rare exceptions, sales in a healthy business should grow yearly, especially in the early stages. If not, then there’s something wrong with your sales pipeline.
Growth in a mature business may not be as significant as in startups. However, it’s still a good idea to keep an eye on how much revenue you’ve brought in over time and how much room you have for growth.
It shows the health of the business. In many industries, a company that isn’t growing its sales and revenue is most likely dying. Revenue growth over time shows a picture of the company’s health.
In addition, this information will help you determine if your strategies are working. You’ll also be able to assess your sales funnel and determine if other areas of your business model need improvement.
Understanding revenue growth is critical because it shows how successfully you sell your products or services and clarifies where to allocate resources. Each additional dollar invested in marketing, advertising, or customer acquisition comes with increased risk. If something isn’t working, it’s time to change.
Investors are also interested in revenue growth, and understanding it helps them make more informed decisions about whether or not they want to invest in a company. When evaluating a potential investment, one of the most important factors that investors look at is the growth rate of the company’s revenues over time.
Revenue growth also helps you recruit top talent. A strong revenue growth trajectory makes your company attractive to prospective employees. When people join your team, they want to know that the organization is stable and there will be opportunities for them to grow.
How Do You Calculate Revenue Growth?
Calculating revenue growth requires comparing your current period’s revenue with that of the previous period. You’re growing if you have more money coming in than last period.
To calculate a company’s revenue growth rate, you need the following data:
- Current period revenue: The total amount of money your business made during that period.
- Prior period revenue: This is just like the current revenue but from a previous period. It can be found in the same place as the current revenue (on an income statement) or calculated by subtracting the last annual report from the current annual report.
These numbers should be easy to find in your accounting system, through annual reports, or from your accountant.
The formula for calculating revenue growth is:
Revenue Growth = (Current Period’s Revenue – Prior Period’s Revenue)Prior Period’s Revenue
For example, assume your business had $100,000 in sales in the first year and you grew that to $125,000 in the next. Your year-over-year revenue growth would be 25%.
Things to Keep in Mind When Reviewing Revenue Growth
You probably spend most of your time thinking about revenue growth as a business owner. When your company grows, you may be proud that you have built a strong business. But when revenue stagnates, it’s time to assess what’s holding you back.
There are some things to keep in mind when reviewing revenue growth.
What’s driving your revenue?
You need to know what drives most of your sales to understand how to improve those sales channels. For example, if most of your sales come from one product, it makes sense for you to focus on improving that product line.
If most come from one location, then it makes sense for you to focus on improving that location by increasing foot traffic, updating signage, or running promotions.
What’s hindering revenue growth?
Is it product quality? High customer acquisition costs? Price sensitivity? There are many possible answers; use data and carefully think through options before deciding what needs fixing.
Will you hit your goals based on your current revenue rate?
Revenue growth is a top priority for many businesses, making it a key metric that investors and analysts assess when determining a company’s success. If you’re trying to grow your revenue, it’s essential to understand where you are now and how much more you need to grow to hit your goals.
Need Help Maximizing Your Revenue Growth?
Revenue growth is an essential metric for measuring your company’s performance. Many business owners operate to increase profits and cash flow through revenue growth but lack the tools and transparency into the figures.
Fortunately, Founder’s CPA can help you clarify what’s driving your business’s revenue growth and develop strategies for overcoming what’s holding you back. We help companies achieve their goals by providing them with the tools they need to succeed.
Contact Founder’s today if you’re ready to maximize your company’s revenue growth!