As with all ratios, it is important to refer back to the previous lessons on ratios so that we can understand the Sales Growth ratio better (even though this one may be quite naturally understood).
Let’s take a look at the equation first so that we can answer our questions about it:
Sales Growth = Net Sales This Year / Net Sales Last Year
**Please note that these numbers are on the Profit and Loss Statement and are usually the very first line. It is usually called Revenue. Please note that Net Revenue does actually come after Gross Revenue on the statement if you had any Sales Discounts or Returns, otherwise, Net Revenue is the same as Gross Revenue.
So the first question requires us to identify the good guy in the equation. I would say that the good guy is the Net Sales This Year. We want the Net Sales This Year to win in this battle.
Question number two is regarding the point of view. Since the bad guy is on bottom, we will be looking at how many of the good guys each bad guy has to eliminate in order for the bad guys to win. So the higher the number the better growth we have had.
For an example, if we had $50 in sales last year and $100 in sales this year, the equation would be $100 / $50 and the answer would be two. Each bad guy has to eliminate two good guys in order to win. This is a very good result and actually means that our sales doubled.
If you were to reverse the numbers ($100 last year and $50 this year), then the result is only .5 now. This means that each bad guy only has to wipe out one-half of a good guy to win and the bad guys win in this case.
We now have a good foundation established for understanding the basics of this ratio and this is definitely important because…
…Your business THRIVES on a solid FOUNDATION!!!