For a business expecting to grow, the past can present compelling evidence regarding where the business is headed. Past financial data can often be a strong predictor of the future. In addition, historical data can lead to better planning and more successful investment opportunities. Here are some tips regarding how to calculate future growth using sales data.
Projecting business growth begins by gathering information to use in calculations. Compute annual net revenue by aggregating total revenue and deducting sales returns and sales discounts not already accounted for in the numbers. In addition, compile a listing of products offered over the past few years. This should include average pricing of each product and the product mix in the sales of each offering.
You also want to project expenses, so gather information related to average costs for materials, labor, and overhead. This includes determining the average cost of goods sold for each product offered. Make note of any material fixed costs that might have started during the last few years since these will factor into your growth rate.
Calculate Percentage Growth
Determining the percentage of growth requires multiple years of information. Take the difference between one year’s information and the next, and divide the difference by the first year’s information. For example, a small business reported total revenue of $200,000 in Year 1 and $220,000 in Year 2. The growth in revenue is 10%, or ($220,000 – $200,000)/ $200,000. The same concept translates to expenses. A product with an average cost of $15 in Year 1 and $18 in Year 2 has grown 20%, or ($18 – $15)/ $15.
The value in these calculations is held in changes over time. Analyze trends in growth rates for at least three periods; this can be three months or three years. Analyze the direction the rates are moving, especially noting the relationship between revenue and expenses. What is growing? What is growing the fastest? Why is this occurring, and does your company have the infrastructure to handle this growth in future periods?
Secure Investments for Growth
The most important feature to many investors is growth. Investors typically want to see stable growth over a period of time, as unpredictable or unstable earnings increase the risk they face. Therefore, projecting growth and determining where you will be paints a picture for investors to envision what will happen to their capital. Presenting projected growth figures and having substantiated evidence to show results in a greater chance for external financing.
In addition, securing the investments ultimately drives the growth. Many successful operations must rely on a base infrastructure to expand. This includes a manufacturing process with equipment, staffing, distribution channels, and marketing projects. These opportunities, all of which result in future growth, require current funding. Therefore, securing financing leads to even more growth opportunities.
Sufficient Inventory Stock
Determining the growth you expect from your company allows for appropriate measures to be taken regarding inventory. First, you will be knowledgeable about what types of inventory, such as finished goods, work-in-process, and raw materials, you will need in the future. This allows you to project inventory purchasing costs. In addition, it allows you to plan ahead regarding insuring inventory, investing in a storage location, and avoiding obsolescence waste.
The key to projecting growth is to determine future customer needs. Therefore, calculating growth allows you to see customer demands and offer the right products at the right price at the right time. You will have sufficient inventory on hand, can plan ahead regarding purchasing required items, and will not have excessive resources tied into inventory susceptible to theft.
Allocate Funds Appropriately
Determining future growth allows you to allocate resources in the best way. Will you have enough staff to handle the projected capacity? Is your business office equipped to handle the volume, or is your online presence reflective of where you will be? Do you have plans in place regarding ordering, storing, insuring, and manufacturing raw materials and inventory? Are your growth projections contingent on a marketing plan, and is that plan actionable?
Figuring out where you will be in the future is the first step to making sure you have enough funds and placing those funds in the right vehicles. Take an example where your growth projections assume you are able to hire additional staff. While developing a budget for a future period, you will able to appropriate the projected amount of funds needed for this position. Although this restricts other opportunities, you are aware of what you need to achieve your goals. You can set aside funds and require them for specific uses to attain the growth you seek.