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Revenue analysis

The starting point of any business is revenues. Without revenues, you cannot pay your bills and generate any profit. It is crucial to understand any developments in your revenues to better understand your underlying business model.

In the following article, I will share the most important analyses to understand your revenues and the underlying business model better.

Seasonality

Revenue seasonality provides an answer to when revenues are generated. Whenever we analyze revenue seasonality, we plot the months January through December on the X-axis and the monthly revenue on the Y-axis. This is typically done for the last two to three financial years (i.e. 24 to 36 months) and provides a solid overview of any patterns. For example, a Christmas market operator will have a strong revenue seasonality during the Christmas time and almost no revenues in other months. A supermarket, in comparison, should not exhibit any seasonality. In tourism, you will find a strong seasonality towards vacations in summer and higher financing requirements before the summer season. This seasonality is important as it helps you understand which patterns exist and whether your business requires financing in periods with almost no revenues.

By dimension

Here, we focus on clients, countries, regions, segments, or products. Revenue by dimension provides an excellent overview of how and where revenues are generated. It also shows dependencies, i.e. on large customers or few products. Over time, shifts in the portfolio can be explained, i.e. more revenue in region X due to the addition of a new sales rep in this region.

Price-volume development

Revenue analysis by price and volume contributes to the how and why revenues are generated —did revenues increase/decrease due to the number of units sold or due to a changed pricing structure. For this, we typically need the number of units sold to determine the average revenue per unit. This way, we can calculate the change in the number of units sold and the change in average revenue to determine whether the revenue development was merely driven by quantity or by pricing.

LTM development

Performing a monthly analysis not with monthly revenue but with the last twelve month figures (LTM) is another excellent analysis to identify whether your business is constantly developing in the right direction.

Focus during a financial due diligence

Revenue analysis is essential for us during a financial due diligence as it helps us understand the underlying business model. It also helps identify if a business is cyclical and how it generates its revenues. This is crucial for finding the right starting point for the business plan.



Key takeaways

  1. Seasonality shows, when the revenues are generated.
  2. Revenue by dimension (segment, country) answers the how and where revenue is generated.
  3. Extrapolating the price and the volume effects helps you identify how and why revenue changed over time.
  4. Analyzing revenues on an LTM basis helps spot a growth trend or declining business.



Final thoughts

A top-line analysis is the starting point to understand a business model in detail and spot trends. It also allows for a comparison with competitors to assess the competitive environment, pricing trends, and demand.




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