Most commercial organisations have two key performance indicators which are monitored continually throughout the year to determine the overall performance of the company. These are Revenue and Margin and both provide insight into the performance of the business.
One of the first drivers reviewed on a monthly basis is revenue or gross sales that are being invoiced to customers. A company’s annual business plan will usually have a revenue budget set for the year to strive for. The budget will be derived from previous growth trends, market environment, new business opportunities and existing customer trading relationships.
Revenue budget is essential to increase turnover, market share and overall size of the business and to keep the focus on the top line.
Margin is the next important factor and is measured in dollars and percentage. Whilst it good to have revenue, it’s not all bankable until overheads and cost have been paid for such as the cost of manufacturing and transportation of goods.
In basic terms:
Revenue is the value of income generated from invoice sales to the customer. All customer related commercial expenditure such as rebates, discounts, promotions, case deals, settlement discounts are deducted from the gross sales revenue to give you nett sales value.
Margin is the result of the Cost Of Goods Sold (COGS) and warehouse & distribution costs. In other words, the cost of manufacturing and logistics, deducted from the net sales value to give gross margin.
Net Sales Value – COGS & W&D = Gross Margin
It is only Gross Margin (GM) at this point, there will be further costs to come out so don’t book the family holiday just yet!
With Revenue and Margin there are two key functions of the business that contribute to the performance of each. The first is the commercial team (Sales & Marketing) who are driving the revenue stream through the consumer and customer while controlling customer related expenditure to reach maximum net sales revenues. The second is the operations team, who are maximising efficiencies and value to keep the costs of manufacturing and logistics to a minimum so that more margin can be gained from the revenue stream.