A company's revenue is the cash it earns from its normal business activities, such as selling goods or services, during a certain period. Ideally, the revenue a company earns is sufficient to cover expenses and provide a profit. This objective is the impetus behind measuring revenue growth.
What Is Revenue Growth?
Revenue growth is an increase in a company’s revenue during a period. For example, leadership can measure revenue growth from one month to the next and cast that growth as a percentage of the historic revenue amount.
Importance of Revenue Growth
A company’s growth rate is a metric that business leaders use to measure the degree to which a business expands its revenue from one period to the next, where that period may be a month, a year and so on. A growth rate calculation may be related to other business metrics, such as gross profit, gross sales or new customers, to lend a view as to the elements of a business that impact its return on investment (ROI).
Consequently, the revenue growth metric offers insights for the decision-making process. For instance, a growth rate alerts management as to what rate must be achieved to accommodate changes in operations. These changes might include the development of a new product or the expansion of a market.
Read More: Difference Between Assets and Revenue
The Straight-Line Percentage-Change Method
The straight-line percentage-change method is an equation that’s often used to calculate the rate at which a company achieves its growth. This method includes two elements:
Trailing Twelve-Month Period (TTM)
When identifying a company’s growth over a 12-month period, you can use the trailing twelve-month period. To do so, you select the characteristic you will measure, such as revenue, and collect data regarding that characteristic for a 12-month period. For instance, you may collect monthly revenue for a 12-month period.
Revenue Growth Formula
You use the following equation to capture an increase in revenue each month for a 12-month period. To do so, for each month in the TTM, you subtract the prior period’s revenue from the current period’s revenue, and divide the result by the prior period’s revenue.
For instance, assume the current period’s revenue is $200,000 and the prior period’s revenue was $100,000. In this case, the revenue growth formula is:
(($200,000 - $100,000) /$100,000) x 100 = 100 percent growth.
Reasons to Calculate Revenue Growth Rate
As stated above, the revenue growth formula can be used to determine the effect of a company’s strategies and tactics. For instance, the growth in revenue following the introduction of a new product influences the future introduction of other products. What’s more, revenue growth can serve as confirmation of the reasonableness of revisions of certain business processes.
Also, the metric may suggest a need to change a process, such as quality control or expanding a product line. In these ways, the review of revenue growth in relation to sales and marketing efforts informs the decision-making processes of company leaders. Also, month-after-month revenue growth demonstrates the possible financial value of investing in a certain company.
Read More: How to Forecast Revenue Growth
Reasons to Use the Revenue Growth Metric Cautiously
The revenue growth rate is not the best metric to use in all circumstances for a variety of reasons. For instance, during a company’s start-up stage, the revenue growth rate will be relatively high and, probably, not sustainable over the long term So, that growth rate should not be used as a baseline.
Also, leadership decision-making benefits more by gauging their company’s growth to that of another similar company in their industry. What’s more profitable growth, rather than growth, is key.
- Compare a company's total revenue growth percentage with the growth of its competitors. The company that is growing its total revenue at a higher rate may be gaining new customers and achieving a competitive advantage over its peers.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.