It’s metric time again!
Revenue growth is almost always at the top of every client’s priority list, so it’s worth a refresher…..
Who uses it?
All companies use a metric like revenue growth. Read Annual Reports, listen to earnings call, and review investors presentations and there is always a reference to a company’s revenue growth which is often referred to as “top-line” growth.
How is it measured?
It is simply the period-over-period growth in revenues. The period may be for a fiscal year, a quarter or the latest twelve months.
What’s in it?
It includes the value of all goods and services a company sells for the period. Let’s look at a few examples. It includes for a manufacturer products sales and other items like warranties and revenue from service contracts. For a bank revenue includes net interest income (i.e., interest income less interest expense) plus non-interest income like fees on credit cards, checking account and wealth management. And let’s take a poke at airlines. The top line includes revenues from passenger tickets and those fees we love to pay like those for changing reservations, checking bags and upgrading seats. These fees by the way for US airlines are now over $15 billion annually and make up around 10% of revenue!
Why is it important?
Revenue growth is one of the most important drivers of a company’s overall financial performance. Companies that grow faster tend to have easier access to capital and a higher valuation. Investors invest in a business to have its executives grow the business. A company cannot save its way to prosperity. No entrepreneur starts a business with the primary goal of cutting costs. Larry Page, a co-founder of Google did not start the company to find ways to cut costs. It was all about creating amazing services that individuals and businesses could not resist and grow the top line. Interestingly, Google’s latest 12 months growth as of September 2013 was over 20% with revenues of approximately $57 billion. For the S&P 500 revenue growth for the same period was only around 3%.
What drives it?
It’s driven primarily by what the company does (its industry) and how it does it. Industries like high-tech that provide products and services that meet new needs or make it easier for individuals and companies to complete tasks grow faster than those industries with more stable demand like consumer products and utilities. For example, research by FinListics shows that for the latest fiscal year companies in the informational retrieval services industry grew revenue approximately 35%, whereas consumer products grew only 3%.
What is the Goal?
Typically, the higher the better. But the goal is not just to grow revenue for the sake of growing revenue. The goal is to create “value-adding” revenue. Revenue adds value when it covers all of its operating expenses and income taxes and capital charges which include returns to creditors and shareholders. Growing revenues that is not adding value is not made up in volume. It just speeds up a company going out of business.
So HOW do you translate this into conversation about value with your clients?
We’ll follow this up on Thursday with The KPI Connection, connecting this month’s metric to key business processes and ultimately measurable impact on your clients’ business, so check back for that.
For a deeper discussion on Financial Metrics, Operational KPIs and how they drive sales, see our previous blog post at http://www.finlistics.com/blog/introducing-a-new-series/.
