One of the questions we often hear from our business clients is, what did my revenue do this month? While this is a standard question, it is not always the best question to ask and not how we typically analyze the results of the business.
There are many factors that can impact revenue on a month to month basis, so always comparing revenue to prior months to see if it increased or decreased will not always tell you the complete picture of the business. For example, if the best month of the year is always September, comparing the results of September to August is a meaningless exercise and will not tell you what is really going on in the business.
Here at Mackey Advisors, we like to look at the revenue rate of growth for both a three-month period and twelve-month period to figure out what is happening in the business and if there are red flags that need to be addressed before it is too late. The graph below depicts the type of chart we typically look at with our clients to understand what is going on.
As you can see from the chart above, the trailing three-month period is a leading indicator of what is ultimately going to occur with the twelve-month period. If you are experiencing three-month sales growth on a consistent basis, you will start to see the trailing twelve-month period to increase as well. So, while the above chart is indicating a solid year from a growth perspective as both the three-month and twelve-month data point is at 18% for the year, there is one red flag we see based on the analysis of the chart. The three-month growth has slowed down and declined from June 2018 to August 2018 and therefore is an indication that our twelve-month rate of revenue growth will start to decline as well.
This would indicate to us the sales pipeline has weakened or not as much focus is being placed on marketing the business. If you start to experience a decline in revenue growth or have negative growth over a three-month period that becomes a pattern, it should alert you there is something wrong in the sales process and needs your attention. If you were just examining the results month over month, you would probably not pick up on the revenue rate of growth until it is too late. By reviewing the revenue rate of growth on a three-month and twelve-month period, you will better understand how the business is performing and if there are any indicators there are potential problems in the sales process.
It is true that revenue is important to any business. So, making sure you understand what those revenue trends are telling you is very important to being successful and making the right decisions at the right time, instead of the wrong decisions at the wrong time.
As always, if you have any questions or would like to learn more, feel free to reach out to any of us at Mackey Advisors (859) 331‑7755.