Controllers and CFOs rely on a variety of metrics to evaluate their organization’s strategy. One of the most critical is your company’s revenue growth rate. This figure provides a snapshot of how quickly a business is expanding and can be a vital key performance indicator (KPI) for startups and companies looking to maximize their scalability.
Consider this your guide to understanding revenue growth rate and how to leverage this metric to evaluate the performance of your company.
What Is Revenue Growth Rate?
Revenue growth simply refers to an increase in revenue over a set period of time. The revenue growth rate is the rate at which this increase occurred. Accountants typically define the revenue growth rate as the month-over-month increase in revenue, expressed as a percentage.
For example, if a company brings in $10,000 in revenue during the first month and $25,000 in the second month, the revenue growth rate would be 150%.
Why Revenue Growth Rate Matters
Controllers and CFOs are increasingly called upon to assist in corporate strategy. How might revenue growth rate intersect with an organization’s larger goals?
Assists in Scalability
The revenue growth rate is often the simplest snapshot of how quickly a business is growing. This can be particularly important for startups, where revenue growth may be a vital way to track progress. But any company can use the revenue growth rate to evaluate its capacity for growth overall.
For instance, a strong revenue growth rate might indicate that it’s a wise time to increase your organizational headcount or invest in a new program.
Tracks Business Progress
Financial professionals can use the revenue growth rate to evaluate the effectiveness of their business strategy — or, more specifically, how their strategy translates into a measurable revenue boost.
Conversely, a negative revenue growth rate might be the first sign that something needs to change. Corporate leadership can use this metric to guide future decisions and align their strategy with real-world results.
Helps Investors Evaluate a Company
This figure is also important for investors. After all, an investment is only profitable when you can purchase a company at one price and then watch its value skyrocket. Publicly traded companies can use their revenue growth rate to entice prospective investors and bring an influx of working capital into the business.
Revenue Growth Rate vs. Revenue
Why might a company look at its revenue growth rate rather than its actual revenue? Naturally, revenue is an important KPI in its own right, but evaluating revenue alone can be misleading. That’s because your month-to-month revenue won’t give you an understanding of how a company is changing over time.
Instead, your revenue growth rate can be used to track progress. A strong revenue growth rate might even be more important for evaluating changes to your business strategy. A high rate of growth shows that what you’re doing is working and that your organization has the capacity to generate continued growth for the foreseeable future.
How to Calculate Revenue Growth Rate
You can calculate revenue growth rate using a simple formula:
Monthly Revenue Growth Rate = (Revenue Month B – Revenue Month A) / (Revenue Month A)
For instance, let’s say that your company earned $12,000 in revenue for month A, then climbed to $18,000 for month B. Using the above formula, we can perform the following calculation:
Monthly revenue growth rate = ($18,000 – $12,000) / ($12,000)
Monthly revenue growth rate = 50%
The revenue growth rate can be calculated over any given time period, provided you have accurate revenue numbers. Some companies may want to track progress using a weekly revenue growth rate, while others may want to compare annual revenue growth rates to track progress over a broader time frame.
What Is the Ideal Revenue Growth Rate?
Just how quickly should your revenue be growing? The Harvard Business Review recommends that most companies aim for a revenue growth rate of 10% to 25%. Keep in mind that this number can depend on a variety of factors, such as the size of your company as well as its age.
Limitations to Revenue Growth Rate
While your revenue growth rate can be helpful for tracking business progress, it can also be misleading. Startups, for example, may experience strong periods of exponential growth that can’t be sustained long-term.
Similarly, some businesses can experience cyclical growth, which means that the revenue growth rate will not be constant throughout the year. The revenue growth rate is a helpful snapshot but doesn’t always reflect a company’s performance over time.
Revenue growth rates aren’t always the best metric for certain business models. Subscription-based models — including software-as-a-service (SaaS) companies — will also need to factor in their churn rate, the rate at which customers terminate their subscriptions.
One Metric Among Many
Ultimately, revenue growth rate should be a major KPI — but one of several. Controllers and CFOs can use this metric alongside others such as cash flow, customer retention rates, and monthly burn rates. These factors can provide a composite picture of your company’s performance and help you refine your strategy moving forward.
Check out the other KPIs in our series below: