Every company must understand its revenue to be able to grow. Revenue serves as the most crucial metric in any organization yet is seldom understood in depth.
There is more than one type of revenue, and the process of recording and calculating it can be complicated. It’s crucial for any business to know what to do with these figures and understand what they imply after the calculations.
What is Revenue?
Revenue refers to your business’s sales of products or services in a given period. It is the “top line” of a company and is the beginning of its income statement. Gross revenue is all the income from a sale while net revenue is gross revenue less returns, discounts, and allowances.
Revenue Recognition
It’s important to also understand when revenue can be recognized. Companies that use accrual accounting recognize revenue when the value of the service is provided.
For example, if Company A was paid $12,000 in advance for a service that will be provided for a year, they can only recognize $1,000 of that per month.
Revenue Classification
Often companies are engaged in multiple lines of business. This could include things like services, manufacturing of a product, or publishing of software. Creating separate accounts within the general ledger to track this revenue will make it easier to understand changes in revenue over time.
ARR & MRR
Subscription revenue is a stable way to grow a business and the two most common metrics to track performance are annual recurring revenue (ARR) and monthly recurring revenue (MRR). Both attempt to capture what is predictable revenue and attempts to remove anomalies and one-time revenue events.
MRR is used for businesses whose customers pay on a monthly basis. To calculate MRR, take the average monthly payment per customer and multiply it by the number of customers. For more information on MMR see: Monthly Recurring Revenue Definition – Zuora
For businesses that have multi-year contracts, ARR is the more common metric. To calculate annual recurring revenue take the total contract value and divide it by the number of years on the contract. For more information on ARR: Annual Recurring Revenue – Zuora
Revenue Growth Rate Formula
A simple approach to calculating revenue is to multiply the number of units sold by the sales price. Service-based companies multiply the number of customers by the average cost of services. Depending on specific situations, the sales growth formula can further be expanded to incorporate more detail. For example, some companies model the revenue formula to the individual product or customer level.
Calculating the total revenue also leads to the next question of how to find the growth rate. By comparing it to the past year’s revenue, you can see if the company is on an upward or downward revenue growth trend.
To calculate the growth rate over one year, subtract the previous year’s revenue from the current year’s income. Divide the result by the revenue of the last year and multiple by 100. The resulting figure is the growth rate expressed as a percentage.
current yr. income − previous yr. income ∕ last yr. revenue * 100
A company can also calculate its month-over-month growth rate. However, this can be misleading for startups as they are likely to register exponential growth in the first few months. This leads to the misguided expectation that the growth rate will remain constant or even increase. In reality, the growth rate often goes down as the company matures.
What Next After Total Revenue Calculation?
By properly calculating income, a company creates a compass by which to direct the future of the company. Depending on the position, a company can use the data it obtains from the revenue formula to:
- Plan both its immediate and future operating expenses (inventory, salaries or wages, suppliers, etc.)
- Determine the best growth strategies by figuring how much to invest in research and development and for upgrading premises or equipment
- Analyze trends by setting up sales dashboards to establish customer behavior patterns
- Update the pricing strategy after establishing if you’re charging too little based on the profit trajectory
What Does Revenue Growth Mean for a Business?
During the startup phase, growth is essential for the continued success of a company. Revenue growth drives business expansion and profitability. Measuring revenue growth looks at overall sales, market share, number of staff, and turnover. If there are too many weak areas hindering revenue growth, a premature attempt to grow the company can collapse.
Can Revenue Grow Too Fast?
Every company wants to achieve revenue growth, but there is such a thing as growing too fast. Growing too fast has caused many businesses to collapse under the weight of success, which can happen at any time in the business’s lifespan.
On average, many startup companies report a revenue growth rate of 178% during the first year. This is followed by 100% in the second, and a decrease to 71% is experienced in the third year. However, growth rates vary widely depending on the country, industry, and company’s development stage. According to TechCrunch, a good growth rate is between 5% and 7% per week, while 10% is exceptional. In comparison, an enterprise corporation with Series D funding has a 60-90% revenue growth rate.
The growth of a company in size and revenue should be constant but gradual, maintaining an average rate of 20%. One significant problem of hyper-growth is the inability to secure expansion capital. There’s a need for orderly participation, anticipation, and realistic planning to prevent this from happening.
On the other hand, slow revenue growth may indicate the need to reevaluate the business position. The problem could be in an underdeveloped branding strategy, lack of collaboration, inefficient business processes, or unrealistic goals.
Closing Thoughts
Revenue growth is a key indicator of a company’s health, and there are many ways to slice and analyze revenue.
As a final note to organizations attempting to bootstrap growth, make sure to pay just as much attention to collections as revenue growth. Plenty of growing businesses have run out of cash while waiting for their customers to pay them.
If you’re trying to get a handle on revenue growth but could use some assistance, we can help. Contact the Delegate team today to book a consultation.