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Pamela McDaniel, Dynavistics, Inc

4 Ways a Revenue Analysis Can Benefit Your Business


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Cookies and milkNo 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.

 

By Dynavistics - Florida Independent Software Vendor (ISV)

One Response to “4 Ways a Revenue Analysis Can Benefit Your Business”

  1. Nevine Youssef says:

    We need a good revenue analysis system. We currently have Microsoft GP as our accounting system. What feature do we need to add to be able to have a revenue analysis or do we need a different system.

    Thank you.