How to Calculate Organic Revenue Growth
Calculating organic revenue growth is a crucial metric for businesses to assess their financial performance and growth potential. Organic revenue growth refers to the increase in revenue that is not driven by acquisitions, investments, or other external factors. Instead, it measures the growth that comes from the company’s core business operations. In this article, we will discuss the steps and methods to calculate organic revenue growth effectively.
Understanding Organic Revenue Growth
Before diving into the calculation process, it’s important to understand what organic revenue growth entails. Organic revenue growth is derived from the increase in sales of the company’s existing products or services, without any external factors influencing the growth. It is a measure of the company’s ability to sustain and expand its market share through organic means.
Step 1: Identify the Revenue Source
To calculate organic revenue growth, you first need to identify the revenue source that you want to analyze. This could be a specific product line, service, or even the entire company’s revenue. It is essential to choose a relevant revenue source that aligns with your business objectives and allows for accurate analysis.
Step 2: Calculate Organic Revenue
Once you have identified the revenue source, the next step is to calculate the organic revenue. This involves subtracting any revenue generated from non-organic sources, such as acquisitions or investments, from the total revenue. Here’s the formula:
Organic Revenue = Total Revenue – Revenue from Non-Organic Sources
For example, if a company’s total revenue is $10 million and it acquired another company that contributed $2 million in revenue, the organic revenue would be $8 million.
Step 3: Determine the Base Period
To calculate the organic revenue growth rate, you need to compare the organic revenue of the current period with a base period. The base period should be a period that is representative of the company’s normal business operations and is free from significant external factors. This could be the same period in the previous year or a similar period from a different year.
Step 4: Calculate the Organic Revenue Growth Rate
Once you have the organic revenue of both the current period and the base period, you can calculate the organic revenue growth rate using the following formula:
Organic Revenue Growth Rate = ((Organic Revenue in Current Period – Organic Revenue in Base Period) / Organic Revenue in Base Period) 100
For example, if the organic revenue in the current period is $8 million and the organic revenue in the base period is $6 million, the organic revenue growth rate would be:
((8 million – 6 million) / 6 million) 100 = 33.33%
Step 5: Analyze the Results
After calculating the organic revenue growth rate, it’s important to analyze the results. A positive growth rate indicates that the company’s core business operations are performing well and generating sustainable growth. On the other hand, a negative growth rate may suggest challenges or areas that need improvement.
Conclusion
Calculating organic revenue growth is a valuable tool for businesses to assess their financial performance and growth potential. By following the steps outlined in this article, companies can gain insights into their core business operations and make informed decisions to drive sustainable growth. Remember, organic revenue growth is a measure of the company’s ability to succeed in the long term, so it is essential to monitor and analyze it regularly.
