Calculating and projecting revenue growth are essential metrics to understanding the health of your business.
To figure out your current revenue growth, you subtract the most recent period you are looking at (month, quarter, or year) from the prior period and then divide the result by that same prior period. If you want a whole number, multiply the remaining value by 100. This number is your percentage of growth between these two periods.
The revenue growth formula is:
Revenue Growth Percentage = (Most recent time period revenue – prior time period revenue) / prior time period revenue * 100
Calculating revenue growth is fundamental for understanding the health of new businesses and established businesses launching new products. Projecting revenue growth is a tricky business but, if used correctly, can be an invaluable asset to a manager’s decision-making.
In this article, I will:
- Go deeper into understanding revenue growth metrics
- Provide you with a revenue growth google sheet
- Discuss the various approaches to projecting revenue growth
- Outline a few standard methodologies for projecting revenue growth
By the end of this article, you should better understand how to identify your revenue growth and have a solid framework to implement when you begin projecting your revenue growth rate.
What is revenue growth?
Revenue growth is the percentage increase, or decrease, in all revenue-earning activities between two equal periods. Revenue earning activities are most commonly sales or service fees but can also be earnings on interest, rent, dividends, and a few less common activities.
Once you calculate revenue growth, you will know by how much the revenue of your business could grow or decline over subsequent periods.
For example, imagine you generate a revenue of $2 million for one year, and the following year your revenue is $3 million. Congratulations, your business had revenue growth of 50% year on year.
How to calculate revenue growth
To calculate the revenue growth rate as a percentage, you can use a streamlined formula like this:
Percent increase/decrease = (time period 1 – time period 2) / time period 2 * 100
Revenue growth formula
In algebra, the revenue growth formula is:
Percent = (x – y) / y * 100
Where x is the revenue of the most recent period, and y is the revenue in the previous period.
It’s important to note that the periods must be of equal size; a month must be compared to a subsequent month, a quarter to a quarter, and a year to a year.
Let’s look at an example of how revenue growth would look from one month to another. Say in your first month you have $1000 in revenue, in month two sales increase and in month three a slight decline.
|Number of Conversions||$32.00||31||$27.00|
For February plugging in our data, the formula would look like this:
Revenue Growth = (1200 – 1000) / 1000 * 100
Revenue Growth = 20%
How to calculate revenue growth in Google Sheets
In Google Sheets, I have created a full-year template that you can plug your data into to find your current revenue growth rate. There are also quarterly revenue growth calculations for Q2, Q3, and Q4.
You can find the Revenue Growth Google Sheet here.
Note that this sheet assumes that you already know your revenue figures for each month.
How to project revenue growth
There are a few methodologies you can take to project revenue growth. The best method depends on the maturity of your business.
For startups with zero sales or expense data, an approach like a top-down analysis could be a viable option. A newer business with a few months of operational data might use a bottom-up analysis or start by calculating expenses. A company with at least a year or more of trusted data could use more advanced methods and revenue growth formulas to utilize the historical data.
Top-Down revenue growth analysis
A top-down analysis looks at the market as a whole and then estimates your share of that market. You can use the TAM SAM SOM model, which helps you focus your analysis on finding the exact percentage of your market share.
Using a top-down analysis, you can calculate the revenue you hope to reach for your market share. From there, you could choose a time frame to reach this goal and calculate the revenue growth rate you would need to achieve this.
Be aware that even though this type of analysis is popular for startup pitches, it is not a sound long-term analysis for operating your business.
Bottom-up revenue growth analysis
For a bottom-up analysis, you start with a specific period and multiply the number of units or services you hope to sell by the price point. From there, you have a projected revenue for the period.
You again forecast how many units you expect to sell each subsequent period and derive your revenue growth rate. A bottom-up analysis, in part, is more realistic than a top-down analysis but is still primarily based on guesswork and can have many unknowns.
Project revenue growth using expenses
An excellent approach for new businesses is to start with what you do know, your expenses. From there, you can forecast out how much revenue you need to break even and then further down the road how much you would need to earn to make your business viable.
Set a timeframe for when you want to reach this point of viability and then the average growth needed to hit this goal.
Expenses could include:
- Cost of goods sold (and delivery)
- Marketing and sales
- Tech expenses (SaaS subscriptions, hardware)
- Payroll (including potential new hires)
- Additional labor costs (contractors)
- Office Rent
- Insurances and licensing
For example, if you are selling a product online for $50 each and the business has monthly expenses of $5,000, you could forecast you need to sell 100 units this month to break even for revenue. In the following month, you want to earn an extra $500 profit, which would mean selling another ten units in the next month and thus projecting a revenue growth rate of 10%.
Forecasting sales to project revenue growth
As businesses get older, their growth tends to slow down. Less than 20% of large companies can maintain high growth rates for more than five years. For any business, it’s vital to know when the revenue growth rates of your business begin to move.
For businesses that have been operating for a year or more, there are several techniques that managers can use to project their revenue by attempting to forecast their future revenue growth. These projections are still a dark art to many, as predicting every macro-level influence on your business is next to impossible.
In its most basic principles, you project your expenses subtracted from your sales for future periods and then calculate the expected growth between these periods.
A few standard techniques for projecting revenue growth are:
- Moving averages: a simpler approach for businesses with consistent quarterly sales
- Linear regression: an analysis best served for businesses with a single independent variable influencing their revenue growth, like expenses.
- Multiple linear regression: businesses can use this when two or more variables influence revenue, like churn rate and expenses.
- Exponential smoothing: similar to moving averages but assigns more importance to the most recent data.
Moving averages for averaging revenue growth rates
A moving average method could be helpful if your revenue data is consistently the same period after period. This approach averages the data over an extended period, and as a new subsequent period is added, the oldest period is removed. As a result, you have a steady revenue growth rate represented by a long-term updated average.
Linear and Multiple Linear Regression
Both linear and multiple linear regression models track historical data to plot the trend of future growth rates. Linear uses one independent variable that influences a dependent variable (revenue growth), for example, expenses. In Multiple Linear, you should have two or more variables influencing your revenue growth. For a business using a subscription revenue model, this could be expenses and churn rate.
Once you have enough data, both methods should plot a trend line to signal where future growth rates are trending.
This method is a great place to start for getting a basic understanding of your trending growth rate. However, the data cannot account for significant variations, as it only provides a straight line of trending future growth.
Exponential smoothing of revenue
Similar to the moving average, exponential smoothing is the process of analyzing your historical data and giving more value to the newest data and, inversely, the least importance to the oldest data. If your revenue data has mild fluctuations, this method will help to smooth out these bumps.
The formula for exponential smoothing would look like this:
Forecasted Revenue = smoothing constant actual revenue data + ( 1 – smoothing constant ) forecasted revenue from previous periods.
Forecasted Sales = αA + ( 1 – α ) Β
- α is the smoothing constant that is a number between 0 and 1. The higher the number, the more emphasis is being placed on the most recent period.
- A is your revenue data.
- Β is the forecasted revenue from the previous period. If you are doing a month-by-month analysis, this is simply the previous month.
The more data you have to work with, the more capable the formula can predict future periods.
Regardless of which projection methods you use, the most robust approach is only as good as the data used. Having a solid foundation of trusted historical data to utilize should be a high priority from day one. If you can’t trust your data to represent past business operations accurately, then any projection analysis will be a waste of time.
Revenue growth for subscription businesses
Accrued revenue is a revenue metric most commonly used for any business that has a subscription revenue model. When examining growth rates for a subscription business, you need to consider the money that has yet to be received in cash but will arrive later.
For example, if you had 100 subscribers each paying $10 a month in January, your annual accrued revenue would be $12,000. In February, you earn another 15 subscribers but lose five to user churn. You now have 110 subscribers for an accrued revenue of $13,200 and a revenue growth rate of 10%.
Using the methods we discussed earlier, you can project the growth of your accrued revenue the same as a more direct sales per unit revenue. One significant difference is to consider customer churn. Even though you are growing, customers who initially said they would pay up are now churning and thus need to be accounted for in the revenue growth projections.
Critical Take-Aways for calculating and projecting revenue growth
Regardless of where your business is currently at, there are basic steps that can be taken to understand your current revenue growth better and to project your future revenue growth.
I outlined the fundamentals of discovering your current revenue growth rate and provided a straightforward google sheet to help you get started.
Then I outlined possible methodologies to project your future revenue growth. The methods that you could use to project your revenue growth are:
- Top-Down revenue analysis: this method is most commonly used by new startups trying to project their revenue by calculating their future share of a market.
- Bottom-Up revenue analysis: the number of sales multiplied by the sales price that a new business hopes to sell projected out into future periods.
- Expense analysis to project revenue growth: beginning with totaling your expenses and then projecting revenue to meet or beat your total expenses within a time frame.
- Moving averages: a method using historical data that averages your revenue growth with the most recent data while excluding older, possibly out-of-date data.
- Linear and multiple regression: using historical data to plot a growth trend line based on either one factor that influences your revenue growth or multiple.
- Exponential smoothing: similar to moving averages, it averages your growth but can also accommodate mild fluctuations from period to period and utilize older historical data.
By implementing and testing these methodologies, you should have greater confidence in understanding your business’s health and revenue growth metrics.