What is a sales index and why do I need one?
Since sales reporting is so important it is crucial for managers to identify the most appropriate ways to analyze and track their sales performances. In sales analysis one of the key issues is sales variations because of various internal and external business factors.
For example when comparing sales for different company’s regions, products, sales reps, sales managers, etc. there is always a seasonality factor or some other factors which can influence the actual sales levels and hide the real or actual revenue performances.
Because of this and for the purpose of better benchmarking and KPI comparisons the index should be developed, calculated and monitored on an ongoing basis.
Establishing sales indices can easily emphasize any inconsistencies in business sales over a certain period of time. The index reports the percentage change or fluctuation from one reporting time period to another.
This time period will depend on the reporting and analysis requirements and the company needs and it might be a year, quarter, month, week or day – whatever suits your organizational reporting needs.
Keeping track of revenue by having an index gives the company important information for decision makers. It compares information for various periods to discover the real results, developments and trends.
For example an index can link present sales to the predetermined index for the previous calendar year to show the way revenue has dropped or increased. In addition the same approach of using an index can be applied to profit margins or any other financial metrics over multiple months to analyze the business performance of the organization. The index assists in creating the accuracy and reliability in your business reporting.
When creating and developing your own index you need to first choose the reporting time period – the one which is relevant for your organization. Next, you need to pick any sales KPI you need or you can monitor your general sales performance.
While you can calculate sales indices for the overall revenue you can also calculate and develop sales indices for a particular sales categories, types or groups which are important for your business such as product sales, territory sales, new product sales, etc.
Now you can select your reporting base time period which is always designated a value of 100. For example your base year will have a value of 100 and this is your base time period which will be used for comparison moving forward into the next periods.
When the revenue for any following time period is greater than the revenue for the base time period, the actual index value for the new time period is going to be more than 100. When the revenue for any following time period is lower than the base time period, the index value for the time period is going to be under 100.
You can monitor, analyze and calculate the index value for every time period by using the following approach:
Sales Index = 100 x Reporting Period (n) / Base Reporting Period
For example if your base reporting period is a year and has a sales of 15,000 and the next year your sales are 18,000 your index will be:
Sales Index = 100 x 18,000 / 15,000 = 120
The value is greater than 100 because you had a sales growth.
On the other hand, if you had a decrease in revenue and your current year has a sales of 12,000 your index will be calculated as follows:
Sales Index = 100 x 12,000 / 15,000 = 80
Since your revenue declined your current value is less than 100.