Sales Growth: Leveraging Data-Driven Approaches

Sales growth is the metric that quantifies your business’s increase in revenue over a specific period. Quite simply, it’s a measure of how quickly your company has been growing its sales.

Sales growth is the lifeblood of any business, representing not only your immediate financial success, but also the health and vitality of your organisation more broadly. It encompasses the acquisition of new customers and the expansion of business with existing ones.

So, while your business may have a lot of metrics to keep track of, sales growth is an important one. It takes the current temperature and tells you how your business is performing, and it’s also something potential investors would look at to gauge what opportunities there might be in your company.

Sales growth can show a positive trajectory, where you’re performing well and growing at a healthy rate, or it can show stagnation, indicating you might need to take measures to repair what’s not working in your sales strategy.

Sales growth is really a key indicator of your company’s financial health, especially if you’re in a growth phase, because it shows the trends of how you’re performing, and how you’re likely to perform in the future.

This type of metric allows you to investigate early if something isn’t working, or to put more resources into sales practices that are working.

Sales growth serves as the foundation upon which you can plan your future strategy. It’s almost impossible to overstate its importance because the impact it has can affect almost all of a company's operations, including:

• Financial health: Robust sales growth directly translates to increased revenue, which is obviously pivotal for funding expansion, innovation, and operational improvements. 
• Market position: Businesses with sustained sales growth are often seen as industry leaders, which attracts investors, partners, and top talent. 
• Competitive edge: Growth is a good sign that customers are choosing your products or services over those of your competitors, bolstering your competitive position. 
• Innovation: Healthy sales provide you with the resources you need to invest in research, development, and innovation, meaning you can create new products or services, hopefully leading to even more sales growth. 
• Stakeholder confidence: Positive sales growth instils confidence in investors, shareholders, and employees, fostering long-term relationships and stability.

Betty's Shoes was seeing high sales growth, and its leadership team saw this as a potent early indicator of the company's overall health, but they were concerned that they may be growing beyond their current capabilities. Seeing the danger ahead on this trajectory, the company decided to allocate a portion of its profits to bolstering operational efficiencies and expanding its workforce. This proactive approach not only ensured smooth operations but also positioned the company for sustained growth.

In this example, sales growth acted as the compass, steering Betty's Shoes towards informed decisions and empowering them to amplify successful sales strategies. By embracing sales growth as a guiding beacon, Betty's Shoes laid a sturdy foundation for a thriving future.

To measure sales growth, it’s important to assess your revenue fluctuations over time. You can use this formula as a simple way to calculate your sales growth:

Sales Growth (%) = ((Current Period Sales - Previous Period Sales) / Previous Period Sales) * 100

This formula gives you the increase or decrease in sales as a percentage between two time periods. That’s useful data, but it will never be the complete picture because it lacks context.

If you want to truly embrace data-driven decision-making, it’s important to go beyond this basic calculation and tap into the wealth of information available through modern analytics tools.

This can include:

• Competition: Knowing how your sales growth compares with your competitors can give you a better indication of what “good” sales growth looks like. If you are operating in an environment of direct competition, this is particularly important. 
• The size of your company: You’re more likely to see higher growth rates in smaller businesses, and it’s also more important to be looking at these metrics when you’re still growing. Larger companies are likely to have hit a plateau, and to see smaller sales growth rates when they’ve already hit higher sales figures. Smaller businesses should be paying closer attention to their sales growth figures because they are more susceptible to fluctuations than the larger corporations, and they’re also still refining their processes. 
• KPIs: What are the key performance indicators that matter most in your business? Is it customer acquisition costs, customer lifetime value, conversion rates, or something else? How long is your sales pipeline, and how do you take this into account when looking at your sales growth? This will affect how much weight you give to your sales growth figures, and the context in which you consider them.

The average annual sales growth rate (ASGR) can be helpful because it offers a more comprehensive view of a company's performance over an extended period. It takes into account fluctuations and trends that might not be evident from isolated or short-term comparisons. To calculate your business’s average annual growth rate, following these steps:

• Identify the starting and ending sales figures for a specific period. 
• Apply this formula to calculate the growth factor: Growth Factor = (Ending Sales / Starting Sales)^(1 / Number of Years) 
• Subtract 1 from the growth factor and multiply by 100 to get the average annual growth rate.

This approach helps to smooth out irregularities and get a clearer picture of your company’s sales trajectory, which can help you to be more specific in your strategic planning and decision-making.

Let’s take, for example, Sunny Side Solar - a solar energy company that wants to evaluate its sales performance over a span of four years to help its leadership to make decisions about its future strategy. Using the ASGR can help Sunny Side Solar to decipher their sales trajectory.

• Identifying sales figures: Sunny Side Solar gathered data on their sales, revealing a starting point of $1.8 million and an ending point of $3.5 million over the four-year period. 
• Calculating growth factor: Applying the formula, Growth Factor = (Ending Sales / Starting Sales)^(1 / Number of Years), they derived a growth factor of (3.5 / 1.8)^(1/4) ≈ 1.252. 
• Calculating ASGR: Subtracting 1 from the growth factor and multiplying by 100, Sunny Side Solar computed an average annual growth rate of about 25.2%.

By harnessing the insights offered by ASGR, Sunny Side Solar was able to gain a nuanced understanding of their sales evolution, enabling them to recognise both seasonal trends and overall growth patterns. Armed with this data-driven knowledge, Sunny Side Solar confidently directed their resources toward expansion efforts during peak seasons, leading to optimised strategies and sustainable growth. The calculated ASGR served as a compass for Sunny Side Solar's strategic decision-making, ensuring they remained on a trajectory of success in the competitive solar energy industry.

What constitutes a good sales growth rate can vary wildly based on industry, market conditions, and business lifecycle stage. As a rule of thumb, a healthy sales growth rate will exceed your industry average and account for inflation and economic fluctuations.

While a faster growth rate might look best on paper, it’s not quite as simple as that in practice. More important than growth is sustainable growth; that is, growth that doesn’t put strain on resources, lead to a compromise in quality or customer service, or present financial or operational challenges.

On the flipside of that, growing too slowly could mean your business struggles to survive.

Aiming for a double-digit percentage growth rate is often considered ambitious, but it’s also indicative of a thriving business. Harvard Business Review recommends businesses aim for growth of between 10% and 25% per year.

If your sales growth rate is on the high side, it could be wise to keep an eye on it to ensure it doesn’t cause stress for your business or become unsustainable. Indicators that your sales growth could be too rapid include:

• Cash flow issues: Quick growth can put a strain on your cash flow, which is critical for sustaining your operations. Increased demand means you need to invest in materials, inventory, equipment, and personnel, and balancing these expenses against income can result in cash flow chaos. Longer payment terms can also exacerbate your cash flow woes, tying up funds in accounts receivable. Taking the time to build a cash reserve can help counter this stress. 
• Operational struggles: Fast-paced growth can put pressure on your internal processes and infrastructure. Managing projections and operational plans amidst a surge in workload is challenging, and miscalculations, like getting your margin assessments wrong, can lead to growth without any profit. Efficiency and quality can suffer too, leading to late shipments and compromised product quality. 
• Hiring issues and talent shortages: Expanding your business means expanding your workforce, but hasty growth might lead to rushed hiring decisions, causing recruitment mistakes and higher costs. If training is insufficient this can compound the issue, resulting in reduced performance and lower morale across the business. 
• Deteriorating customer satisfaction: In the race for growth, customer satisfaction should always be at the centre of your practices. Rapid expansion can dilute the focus on customer service, resulting in negative experiences, negative reviews and a loss of customers.

If your sales growth rate is low, it could be a sign of real trouble, with your business becoming unsustainable and potentially not able to survive. Indicators that your sales growth could be too slow include:

• Complacency: Sluggish growth can lead to a lack of motivation, which can hinder innovation and long-term planning. Ignoring opportunities or ideas for new products or services can stall progress and erode your market positioning. Staying vigilant, embracing innovation, and addressing customer demands are critical. 
• Financial conservatism or stinginess: If your cash flow is low, you may be tempted to withhold spending, fearing financial risks. This approach can inhibit investments in employees, infrastructure, marketing, and development, however, and such caution can result in obsolescence and market share erosion. Reinvesting in the business bolsters its foundations and secures long-term growth prospects, but you need the sales growth to make it happen. 
• Strained employee resources: Lethargic growth often leads to understaffing, stressing out your employees and putting strain on their effectiveness and well-being. Staff members juggling multiple roles can experience burnout, negatively impacting productivity and morale. Leveraging freelancers or contractors can address any staffing shortfalls you have in the short term, helping to maintain a healthy work environment for everyone. 
• Cash flow constraints and financing challenges: Slow growth can make it harder to access financing, putting your stability and innovation in danger. Traditional lenders and investors may shy away from businesses with stagnant sales growth figures.