One of the many questions that I get asked by clients is “how do I work out my sales growth?”
Fear not, the answer is much easier than you might think.
Firstly, lets look at why sales growth, as a key element of business growth, is important:
The Importance of Sales Growth
Fundamentally there are two ways to increase your profits:
1) sell more product/services
2) reduce costs
The reality is that many businesses will actually have to do combinations of both, but put simply that’s how you do it; increase sales or reduce costs.
Sales growth is important to know for a number of reasons:
1) the general health of your business
2) identify whether you are hitting your targets
3) demonstrate to investors (or the bank) that your business is successful
When looking at your sales growth you should always ask yourself is whether it is:
Consistent, Profitable Sales Growth
Sales growth needs to consistent and profitable – in that order. Sales growth needs to be consistent – because you need to be able to manage the growth of your business. Your business won’t be around for long if your sales double one year, then halve the next. It will take vast amounts of cash to scale your business quickly when it doubles and take too long to reduce costs when your business halves. Growth needs to be manageable.
If you’re looking for investors then you want to be able to give them the confidence that your business is growing and your sales numbers don’t look like an outline of the French Alps.
Sales growth also needs to be profitable. It is no good selling more of your products if you loose money on every item that is sold (this may be ok for a promotion, but long term it is not) otherwise your business will only be around for as long as you have cash.
Calculating Sales Growth
To calculate sales growth you need to know two things:
1) What are the sales for the previous period you want to compare with
2) What are the sales for the current period you want to compare to
The most common comparison is comparing this year to last year, or month vs month eg September last year with September this year, but the formula will work for whatever period you want to compare.
There are 3 steps:
- Take the current period subtract the previous period (the cash difference)
- Then divide the outcome by the previous period and
- Then multiply the answer by 100 (to convert to a percentage)
If your answer is positive, congratulations, you’ve got sales growth – but is this what you were expecting?
If your answer is negative, do you know why? – what can you do to address this?
Here’s a picture of the calculation:
Current period: £10,000
Previous period: £8,000
(10000-8000) = £2,000
Divide by £8,000
Multiply by 100