Small Business Tips

How to calculate sales growth

Manasa Reddigari

Is your small business growing or stagnating? One way to tell is to calculate your sales growth.  

Not sure which numbers to crunch? Keep reading to learn how to calculate sales growth.

What is sales growth?

Sales growth is the percent growth in the net sales of a business from one fiscal period to another. Net sales are total sales revenue less returns, allowances and discounts.

You would be comparing an earlier period of lower sales with a later one of higher sales. Generally, the two periods are also of a corresponding length. For example, you would not compare net sales from one quarter of one fiscal year with the full year from another. Instead, you might compare sales from two successive fiscal years ending March 31st.

Why should your business care about sales growth?

Calculating and analyzing sales growth can inform you about:

  • Your periodic financial performance. You will learn whether sales rose between two periods and if so, by how much. If you find that sales stagnated over time, you can adjust your future sales strategy.
  • Your business’ profitability. Your periodic financial performance can speak to the general profitability of your business. Increased profits may give you cause to increase dividends with shareholders. In turn, this may give a boost to your stock price.
  • Your performance relative to competitors. Knowing how to calculate sales growth can tell you whether you are doing as well as or better than your peers.
  • The state of the economy. A high percentage of sales growth can be a sign of high consumer confidence in the economy. During these periods, consumers spend more. On the flip side, stagnant or declining sales may point to a weak economy. People spend less during these periods. If your sales were higher in the same period last year, the economy, and not your sales strategy, may be to blame.

What do you need to figure sales growth?

You’ll need the net sales figures from the two financial periods you’re comparing. As such, you’ll need either:

A comparative income statement that cites the net sales for both periods.

A separate income statement for each of the periods. Each should cite the net sales for the relevant period.

Keep in mind that the income statement may refer to net sales as “sales.”

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How do you calculate sales growth?

To start, subtract the net sales of the prior period from that of the current period. Then, divide the result by the net sales of the prior period. Multiply the result by 100 to get the percent sales growth.

Below is a formula for how to calculate sales growth:

G = (S2 – S1)/S1 * 100

where

S2 is the net sales for the current period

S1 is the net sales for the prior period

Let’s take a look at an example. Harry’s Auto Parts wants to figure its sales growth for the years ending March 31st, 2017 and March 31st, 2018. The net sales for the former period were $201,000. The net sales for the latter period were $210,500.

The business had an annual sales growth of 6.2 percent.

Here’s the math:

S2 = 213,500

S1 = 201,000

G = (213,500 – 201,000)/201,000 * 100

G = (12,500)/201,000 * 100

G = 0.0622 * 100

G = 6.2 percent

What’s a Good Sales Growth Rate?

A good growth rate is whatever business owners and stakeholders determine to be so. Small businesses that made less than $5 million had a 6.1 percent sales growth on average in 2017, said SageWorks. That was a drop from the 2016 growth rate of 6.9 percent.

So “good” can vary from year to year. Look at sales growth alongside your historical performance and economic and competitor growth.