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What is Revenue Growth? How to Calculate and Improve it
Published on Tuesday, January 18, 2022
If you’re serious about growing your company, it’s time to graduate from Excel sheets when it comes to tracking revenue growth. Understanding your current revenue growth rate and its contributing factors requires getting a good handle on the concept and its complexity.
Below, we’ll discuss the best ways to think about your company’s revenue growth as well as the metrics and tools you can use to monitor and improve it.
What is Revenue Growth?
Simply put, revenue growth is a company’s income over a specific time period compared to an identical time period in the past. For example, the money your company made this year versus last year. Expenses aren’t taken into consideration for this measurement.
Revenue is different from both sales and earnings and gives us different information about a company’s growth rate.
- Sales is the money they made selling services or products only
- Earnings show sales revenue after deducting expenses.
- Revenue considers income of all kinds, including sales, investments, and royalties.
How is Revenue Growth Calculated?
Revenue growth is calculated as a percent increase from a specific starting point. The formula for revenue growth requires you to subtract the previous period’s revenue from the current period’s revenue, then divide it by the previous period’s revenue.
Here’s the formula:
(Current Period Revenue – Previous Period Revenue) / Previous Period Revenue
Let’s say a company made $820,000 in 2020 and increased its revenue to $1 million in 2021. Here’s how to determine their revenue growth from 2020 to 2021:
($1,000,000 – $820,000) / $820,000
Now, we calculate $180,000 / $820,000 and end up with roughly 0.2195. That means the company’s revenue growth from 2020 to 2021 was 21.9%.
The same formula can be used to measure monthly revenue rates as well. It can be used for any time period as long as those periods are the same length.
Of course, this is easy math, and it can be done in an Excel spreadsheet if need be. But evaluating revenue growth is a lot harder than solving one simple equation. To keep up a company’s growth rate or improve it, you have to account for other things that helped increase revenue between two time periods, including new hires, new sales strategies, increased supply/demand, etc. That’s not something an Excel sheet can help you calculate.
Strategies for Improving Growth Rate
Let’s face it, most companies rarely see a growth rate like the fictional company above, at least not regularly. It’s normal for these rates to fluctuate, but keeping track of them consistently (and across different time periods) is critical if you’re going to catch revenue problems early.
If your growth rate isn’t where you’d like it to be, there are a variety of approaches you can take to solve the problem that doesn’t involve simply cutting corners. A crucial first step toward improving your revenue growth rate is strengthening the foundation of your business.
Invest in your workforce
To change anything about your business, you need buy-in from employees. After all, they’re the ones executing the vision. Here are just a few things to consider when it comes to investing in your employees:
- Encourage professional development and upward mobility
- Hire new staff when demand rises instead of overextending your current workforce
- Create a culture of collaboration, openness, and empathy to increase morale and reduce costly turnover
- Reward good work to encourage productivity
- Invest in leadership training for managers
Align your revenue channels to your goals/targets
To meet targets, you have to set them. This type of strategic planning allows you to identify specific goals related to your revenue stream, prioritize them, decide on measurement metrics, and then focus on what matters most.
Here are just a few metrics that can play a role in realigning your approach to your revenue channels:
- Geography – For national and global corporations, growth is bound to be uneven in different geographic segments. Monitoring the success of your business in different locations can help you make strategic decisions about staffing, product development, sales strategies, and more.
- Product Mix – If your company offers a variety of products and services, it may be time to look at the breadth of your offerings and ensure the revenue stream for each is where it needs to be. This can play into geography as well, especially if you need to tweak your product mix for a particular set of buyers.
- Sales Channels – We are in the age of the omnichannel approach to sales. For example, the pandemic forced most companies to pivot harder into their online sales channels or create new ones. Companies that didn’t have the technological agility to make this move suffered as a result.
- Building partnerships and taking advantage of indirect sales channels can play a large role in revenue growth as well, but it’s critical to have metrics for success and monitoring capability to ensure you’re getting what you need out of indirect channels.
- Marketing – Rarely is it that case that “if you build it, they will come.” Strategic marketing is a must, but so is tracking its contributions to revenue growth. And that’s where many companies fall short.
Invest in Technology to Automate Your Processes
Even the best strategies for revenue growth are going to be difficult to implement without the right technology. And one of the major impediments to this is the legacy technologies that so many businesses employ and find too costly to replace.
Not only do legacy systems thwart agility, but they don’t play nice with updates or new technology. This can hold back a company that is trying out new approaches to measuring, predicting, and planning for revenue growth, and this is especially true of 21st-century businesses offering new products and sales models, such as B2B SaaS companies.
Digital technologies can help rev your growth engines, but many companies will have to take a good, hard look at their legacy systems first. The good news is that platform management tools are now easier to use than ever. Their intuitive user interfaces don’t require extensive training, which can waste precious man-hours.
What to Look for in Software Platforms to Increase Your Revenue Growth Rate
There’s no single secret recipe to revenue growth, but there are lessons that apply to all companies when it comes to success. By now it should be clear that working with legacy systems will be a major impediment to growth transformation. But what’s the secret to success, when it comes to your software? What should it allow you to do?
- Dynamic, Real-Time Visibility – Running reports becomes easy with capable software, and it doesn’t require hours of time and paperwork. Being able to bring up a real-time sales report for a geographic sector, for example, prepares companies to identify problems before they affect revenue growth.
- Optimize Sales and Marketing Performance – Understanding your customer base and the segments that are likely to produce the highest return requires a comprehensive dashboard. Without the ability to bring together information from otherwise siloed departments, you can’t get the big picture when it comes to identifying clients with high growth potential and you risk developing a high churn rate.
- Transparency – You don’t want your analytics locked in the dreaded “black box.” The right software allows you to show the data that went into generating reports and making decisions. In the long run, being able to justify these data-based decisions can lead to a culture of openness and trust.
- Comprehensive Revenue Forecasting – Advanced analytics and predictive machine learning capabilities are the keys to predicting customer, product, and sales success and identifying avenues to invest in.
To secure future growth and pivot resources to your core revenue drivers, you need the ability to see both the big picture and granular data in real-time. The right software does the work for you, storing historical data, tracking current sales and marketing activities, and giving you an accurate and reliable forecast of which paths lead to revenue growth – and the ability to automate these forecasts is invaluable.
Analyzing Your History to Build Your Future
A software platform should allow you to track your past metrics, create new measures of success, and help you generate new ideas about growing your revenue. Attempting to do this manually takes time and can lead to costly human error.
The good news is revVana and Salesforce can help you eliminate unreliable revenue forecasting processes in favor of fully automated forecasts that can help illuminate the path to a bigger, better future.
FAQ’s About Revenue Growth
What is a good revenue growth rate?
According to McKinsey & Company, the “Rule of 40” says that “a SaaS company’s growth rate when added to its free cash flow rate should equal 40 percent or higher.” But they also noted that few companies truly attain this number, with the median being closer to 22% (for public SaaS companies in the US with revenues of $100 million). Depending on the size and age of your company, a good growth rate can be anything from 15% to 45% or more.
How do sales differ from revenue?
Revenue can be tricky to track because it is all-encompassing. It involves the entire income a company generates from its core operations. Revenue numbers are calculated before expenses of any kind are subtracted. Sales, on the other hand, are a more narrow kind of revenue. These are the proceeds a company generates from selling goods or services to its customers.
Revenue figures are generally higher than sales figures because they include supplementary income sources.
Why is revenue growth important?
We can’t simply calculate our profits and call it a day. Revenue growth is a key indicator of a company’s performance and growth potential and is the most important metric that is used in calculating the valuation of a company.
What causes revenue growth?
A wide variety of factors can influence revenue growth and a good dashboard will be able to show you the metrics you need to choose the right issues to look at. Revenue growth can be improved by increasing sales velocity, conversion rates, market size, and the technology you invest in to grow your business.