Learning how to calculate growth in sales is one of the most important things you can do as a business leader. After all, growth is something every sales company wants to pursue at all times. It ensures your company can continue to thrive in competitive times, and it’s how you know you’re making the right steps in developing your business.
So, how do you calculate your sales growth formula?
What is a Sales Growth Formula?
Sales growth is a term used to refer to increase in the percentage of sales made within a specific time period. It’s a comparative measurement, allowing you to track the progress of your business from one month or year to the next.
The most common sales growth formula looks like this:
Growth = (Sales2 – Sales1) / Sales1 * 100
In this sales growth formula, “Sales2” refers to the net sales you’ve achieved in the current period, while “Sales1” refers to the net sales you’ve achieved in the prior period. For instance, imagine in the first quarter of the year you achieved a net sales number of $200,000, while in the second quarter, you achieved a net sales total of $250,000.
The math would work out as follows:
Growth = (250,000 – 200,000) / 200,000 * 100 = 25
According to this calculation, your growth rate would be 25% between both quarters.
How to Calculate Growth in Sales: Different Methods
One point to keep in mind when you’re calculating sales growth, is there are different ways to examine your progress. Most of the time, the different methods you use will vary depending on the periods you’re looking at. For instance, you can consider:
Monthly sales: For smaller companies, it may make sense to measure a growth in sales from one month to the next. This can help you to track whether your sales are growing from one period to the next in quick succession. However, it doesn’t account for seasonal and annual fluctuations. For instance, your sales in December may be naturally higher than sales in June.
Quarterly sales: Looking at quarterly growth gives you a little more freedom to collect information over a series of months, which can account for a little more fluctuation. However, there’s still a chance some of your quarters will be more valuable than others.
Yearly sales: The easiest way to ensure your entire business is growing is usually to look at the entire year of sales from one year to the next. This helps you to negate any potential fluctuations in monthly revenue.
Whenever you’re calculating your sales growth formula, keep in mind you should also leave room for context. Making notes in your sales calculations when major changes happen can help you to understand progress from one month or year to the next. For instance, if you’ve just launched a new product, you’re likely to have higher sales when the product is still new than you would in general.
Why is it Important to Calculate Growth?
Growth can be affected by a lot of different things in your business. The economy and surrounding factors can influence how successful a business is from one year to another. This could mean that even if you don’t see significant growth one year, your business isn’t necessarily unsuccessful.
However, the complexity of calculating sales growth doesn’t make it any less important. Calculating and analyzing your sales growth regularly will help you track:
Periodic financial performance: You will learn whether sales are rising between different periods, and if so, how much they’re rising by. If you find your sales are stagnating, you can research why this might be the case.
Profitability: You’ll need to keep a close eye on your sales growth so you can prove your business continues to be profitable. This will be important when you’re trying to attract investors and shareholders.
Opportunity: If your sales growth is stagnating compared to the numbers achieved by your competition, this could be a sign you need to look for other opportunities to grow. Benchmarking your performance against your competition can help you to decide whether you should be investing in new products or exploring different markets.
Above anything else, learning how to calculate growth rate will help you to keep a closer eye on what’s going on within your business landscape, and whether you’re making the right steps towards business success.
What is a good growth rate?
One of the challenges of measuring growth rate is determining what a good growth rate should look like. There’s no one-size-fits-all answer to this question. For the most part, a good growth rate is essentially just whatever your business owners and stakeholders consider it to be.
A good growth rate can also vary from year to year depending on the situation. For instance, during the pandemic, many companies had to accept a lower than usual growth rate, simply because the economy was struggling.