In this series we are going to examine how to measure and analyze the revenue stream. Not just the simple charting, which we’ll cover, but a little more in depth with percentages, a running average, and finally Z-Score measuring and projections. In each of the sections we’ll give a little depth of what to look for and a few of the pitfalls to avoid when using a particular method. When we wrap up the series we’ll show you how to project future revenues, adjusted for seasonality and with a growth factor, and give you the Excel workbook where we did all of our work. Really good stuff.
To start, we’re assuming you have a few years of monthly revenue figures to work with. You can do it with less, but it doesn’t show as much of a trend. In our example we have three years of data and we are half way through our fourth year.
Our fictitious company has been in business for a few years and has been growing steadily at about 10% year over year (YoY) for the last few years, this year they have projected a 10% growth over last year.Does the data follow a basic pattern?
If you look at the trends, it’s pretty evident the lines all pretty much follow the same trend, peaking in March and April and then dropping in the summer months, then rising slowly for the rest of the year. In this case we’re selling a product that is not seasonal, like furniture. The story this is telling is about the general trends of the customer. In this case they are using their tax return which produces the Mar/Apr peak. Then we walk into the summer, when discretionary spending shifts to vacations and other summer activities, and lastly slowly rising through the rest of the year. My last company Industrial Hobbies followed this exact pattern, and those summer months get real slow and scary if you don’t plan for them, but does offer some great opportunities if you do.
In my experience, your data will follow a pattern. If you’re a summer business like a pool supply store, you’ll see your peak in the summer, and then it snow mobiles in the winter. If you have no trend and everything is all over the place like the chart below, call me.Back to our real example:Now that you have a basic revenue by dollars chart and I’ll assume you have some sort of general trend, here is what the chart can generally tell you:
- Year 4 is doing better than the previous years.
- May through August is a good time for vacations and perhaps seasonal lay-offs.
- May and June is a good time for production improvements and investing in the company, things that take time and money, while you still have both.
- July and August is a good time for improvements that just take time and no money, like cross training your employees and establishing plans for next year.
- March and April you might want to restricted employee vacation.
- If you are hiring a commission sales person do it in May–July, they might lessen the severity of the trough, if you do it at the peak the other sales people might not be too happy.
- If you’re hiring production, do it in October or later after you are out of the trough.
- Ramp production in January and February for the coming peak.
What it can’t tell you:
- Year 4 is doing better than the previous years, but you don’t know if its meeting projections and you’re on target to meet goal.
- It cannot project or forecast.
- If you need to account for previous months revenue shortages or overages and roll them forward.
- No percentages, which I really like.
- Generally speaking, it’s hard to hold any kind of accountability to it, because it is more of a qualitative nature (vs quantitative), and is just how the trend looks.
If this is the first time charting out your revenue, print it out really big in color (Staples) and put it on the wall and then have all your trusted employees and advisors look at it. Ask each one of them “What story do you see here?” Trust me, every story will be different. Sales and marketing will see it one way, production another, and accounting will be different as well. It’s those stories that have the value, so take notes and consider what’s being said when planning and forecasting.
Next in our series of measure and analyze the revenue stream we will introduce the percentages and show how that tells a slightly different story when analyzing the revenue along with the benefits and pitfalls of that method.