While some companies are satisfied only looking at total sales, there are a number of ways for you to do business consulting and analyze your client’s revenue. Beyond looking at just the aggregated amount at the top of the income statement, you gain deeper insight by measuring margins, comparing revenue against other general ledger balances, and performing ratio analysis.
Reasons to Diversify Revenue Analysis
Looking at revenue from different angles allows you to better understand how your clients are performing. Sometimes, the total amount of revenue is misleading. A single dollar amount doesn’t tell you how your client is performing over long periods or across periods. There are no trends across months to analyze. Just digging into revenue doesn’t let you know if your client is using its assets efficiently or if it is spending more than it is earning.
Don’t focus solely on the total revenue earned. Instead, look at your client’s revenue across periods. What has its revenue been each of the past six months? What was revenue each of the last three years, and why have there been changes? Calculate growth percentages by dividing the change from one period to the current period by the total revenue in the current period. It may sound great that this quarter’s total sales equaled $120,000. However, if last quarter’s total sales was $119,000, your client’s growth percentage of 0.83 percent isn’t as impressive.
Generating sales typically results in expenses. As your client earns revenue, it incurs expenses such as manufacturing costs, selling costs, or administrative costs. Instead of looking at what sales have been made, it’s more useful for you to look at what the net impact is on sales after accounting for related costs. If your client earned $10,000 this month, that only portrays a portion of how it did. If it incurred $2,000 of expenses, it had a great month. If it cost $15,000 to generate that revenue, you have a problem to examine.
Subtract your client’s product expenses from its sales revenue to calculate gross profit. You can also divide gross profit by total revenue to calculate gross profit margin. These same concepts can be applied to net income. Subtract your client’s total expenses by total revenue; this is your client’s net income. Net income divided by total revenue is your client’s net profit margin. All of these calculations give you information about your client’s total operations. This lets you make better decisions, be more strategic, and avoid making incorrect assumptions.
Revenue vs. Assets
You also glean information about your client’s performance by comparing its revenue to total assets. The basic idea behind any company is to use its resources as efficiently as possible to generate as much revenue as possible. Divide your client’s total revenue by total assets. This calculation is your client’s asset turnover; it’s used to understand what investment has been made in the company and how well resources are being used to generate revenue. This type of financial metric is most useful when being compared. To maximize the benefit of knowing your client’s asset turnover ratio, compare this calculation to industry averages, competitor figures, or prior year results.
It’s important for you to look at your client’s total sales, but there are better ways to gather information about how your client is doing. Looking at your client’s performance from a broader perspective gives you a better sense of how it is actually operating. Incorporate your client’s assets, expenses, and revenue over time to get the best picture of your client’s finances.