4 Ways a Revenue Analysis Can Benefit Your Business
No one likes to work on the
premise of lowered expectations. It goes
against the grain of competitive business.
But the reality is that business works on a curve. Customers fit somewhere along that curve, and
at any given time, they can be rising above or dropping below the ideal
arc. If your finance department can tell
at a glance how much a customer has spent, and how much that spending has made
for the business, then huge headway has been made and many misfortunes have
been headed off. Why make Finance
manually calculate who gets orders shipped on credit? Know with certainty with a few clicks when a
customer pays late, on time, or even early. Arm yourself with the software
tools to know who has been naughty or nice, who is in it for the long haul, and
who is just out to cop Santa’s milk and cookies. Here are 4 ways a revenue analysis can
benefit your business:
Customer Revenue Analysis
One immediate benefit of the
customer revenue analysis is that it allows your business to recognize the
revenue generated rather than the units sold.
This is an important factor to keep in mind, as you might find some of
your customers only purchase products when they’re on sale, therefore
generating far less revenue than sales on products at list price. The customer ranking should take into account
the customer revenue analysis so that customer profitability is part of their
ranking. Another way a customer revenue
analysis could be used is by comparing an individual customer to the “average
customer,” and average customers within the same ranking. This points out which of your customers it
pays to give attention. What is the
average customer? The average customer
in this situation is the mean revenue recognized from all your customers and
from all customers in the same customer ranking. This analysis allows your
business to see the traits and uncover trends of the customers’ revenue
generated in total, by ranking, and for an individual customer. As the great Peter Drucker once said, “What
gets measured, gets managed.”
Sales Revenue Analysis
A sales revenue analysis is a
breakdown that allows your business to see how the business is performing in
comparison to previous years, and estimate how it should perform in the future.
The sales revenue analysis shows which products are generating more revenue for
the firm in any given time frame. The
time frame could use historical data for trend analysis or projected estimates.
These projections can offer your business key insights, including when it’s
generating more revenue in some months than others throughout the year. These
trends could move in cyclical, seasonal or monthly trends, depending on your
industry of course. For example, a tax
consultant is likely to generate most of his revenue in the first four months
of the year due to tax season. A tax consultant could still generate revenue
during the rest of the year, but it is a significantly smaller amount than
regular tax season.
It is extremely beneficial to
pull these trends on an annual, monthly or even daily basis if possible. This will greatly assist in reviewing
estimated versus actual revenue. Another
aspect to consider when looking at a sales revenue analysis is recognizing the
trend of specific product sales to help decide which products or services to
allocate more funds. Some products just
sell better at different times of the year, like Christmas socks during
December. The money allocated to new
product sales represents profit that the business can reinvest into its
operations to further increase revenue. This analysis can also assist with
inventory decisions, including whether to increase, reduce or maintain current
product inventory levels - all of which can play a role in increasing revenue.
Sales Revenue and Profit Analysis
The difference between sales
revenue and profit is an important distinction for all sales and financial
departments to acknowledge. Sales revenue is the dollar amount collected for
products and services. However, not all
sales revenue is turned into profit. This is due to several reasons:
A business could have a sales
increase but see their profit decrease because expenses increased at a higher
rate than sales.
Not every sale generates profit.
Just because sales person sold a product does not mean the invoice will be
paid. The customer may need and want the product, but if the customer cannot or
will not pay for the product then no profit is generated. This unhappy scenario
would cause the business to lose money by spending time and labor on sales and
collections.
Payment Analysis
Putting together a payment trend
analysis for customers also has its share of benefits, including capturing days
sales outstanding (DSO) and payment trends. The sales person and finance
department should have this information available to make credit, payment
terms, and order shipping decisions. This analysis could easily highlight a
high volume customer that usually pays 15 days late. This information could
help determine why a customer is in a lower customer ranking or why the finance
department has not increased the credit limit.
One solution to effectively
monitor and manage payment trends is the use of an accounts receivable
management and credit collections system. This system should organize,
categorize, and report the data so that tracking DSO, aging invoices, and
high-risk clients is automatic. With a system in place, you can be proactive in
your collections process and improve cash flow. You will no longer need to ask:
What invoices are late and how much money is owed by aging category? How often
are customers contacted directly about unpaid invoices? What percentages of
your customers pay on time?
The future belongs to those who
can predict it, and according to Mr. Drucker, “the best way to predict the
future is to create it.” When Sir Isaac
Newton invented calculus, people thought he was crazy to talk about capturing
instantaneous information on a curve. He
was not only right, but he gave us the ability to take snapshots of things that
people might still not dream are possible to analyze. Yet, the software exists today and it is
affordable. The power to glimpse a
customer’s spending patterns and predict their contribution to your business’s
profitability is immense. Beyond being
affordable on the front end, such software solutions add tremendous revenue
down the line for the life of your business.
No one likes to be written off.
But when they have taken advantage for so long, essentially taking a
free ride, it is time to know when to hold them and when to fold them. Harness
the benefits of the revenue analysis and create the future you want for your
business.
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