Sales Analysis Techniques
Analyzing sales results typically involves examines sales data, such as sales closed per month, to understand and improve to overall performance. Use the data and compare with previous data to make good business decisions. Analyzing sales helps your business as whole and your sales professionals specifically align performance with strategic objectives and market trends.
Step 1
Calculate your net working capital turnover by dividing net sales by your average working capital. A low ratio could indicate inefficiencies in your organization. A high level could mean that you use too much capital.
Step 2
Calculate sales growth by subtracting sales revenue for the last year from the current year and divide that by the sales revenue from last year. Multiply that by 100 to get the sale growth percentage. Determine if your business is growing, declining or remaining flat and take action to remedy any problems. For example, if sales for a particular product decline consistently for three years, consider implementing an end-of-life strategy for the product so you can focus on other efforts.
Step 3
Determine an affordable growth rate by dividing your company’s net income by last year’s earnings and multiply that by 100. If your sales growth exceeds your affordable growth rate, you may need to allocate additional assets and inventory to sustain growth.
Step 4
Calculate your break even percentage by dividing gross profit by total expenses and multiplying by 100. The results reveal what sales you require to break even, neither make a profit or lose money. Use this ratio to identify actions necessary to increase sales in order impact profits.
Step 5
Create a mind map to examine strengths and weaknesses in your sales strategies. For example, write one of your strengths, such as experienced sales force, in the center of a page. Draw a circle around it. Draw lines out from the circle and label them with reasons why you have been successful in the past. Use this technique to help and your sales force learn from your experiences and remedy shortcomings.
Step 6
Locate competitive data from your competitor’s websites, or Hoovers or Dun & Bradstreet, to assess your company’s market share. Look for sales patterns and trends, such as seasonal variations, random events and cyclical patterns. Adjust your sales strategies to accommodate and exploit these opportunities.
Step 7
Get customer feedback regarding recent sales. Run focus groups with selected individuals to learn more about their personal experiences with buying your products. Conduct online surveys to get information you can use in forecasting future sales figures.
Sales Volume Analysis
Your sales are rising but your profits aren’t, even though you’ve been controlling your overhead costs. Your accountant tells you it’s possible to decrease your sales and increase profits. A bit of number crunching can explain why. Both of these scenarios require an analysis of your sales volumes to determine how you’re generating revenue and expenses.
Sales Volume
Many business owners use the terms “sales,” “revenues” and “income” interchangeably, but they each have separate meanings. In some instances, “sales” refers to the number of units of a product or service you sell, rather than the money you receive from selling them. Tracking your sales by volume, or number of units sold, can help you identify what is affecting your revenues, expenses and profits.
Types of Sales
One of the first steps in analyzing your sales volume is to differentiate among the different types of sales you have. Start by counting the number of units of each different product you sell, rather than your total sales. Next, calculate how many units and how much of your sales revenue comes from each different distribution channel you use. For example, if you sell shoes, determine how many you sell in retail stores, how many you sell online and how many you sell in print catalogs. If you analyze your volumes by customer demographic, you might find that older women are buying most of your product. Other factors to evaluate include sales volumes by geographic territory, sales rep and price.
Profit Margin Analysis
Once you know how many units you’re selling and where you’re selling them, sort your sales volumes by profit margin. This will require that you work with an accountant to accurately determine your production and overhead expenses. Production expenses relate to making your product, while overhead costs refer to running your business and selling your product. You might find that your largest-selling item produces the lowest profit margin and that you might be better off dropping it and using that money to concentrate on making and selling products with higher margins. Alternately, you might look for ways to make and sell this product cheaper. This might include using different materials or choosing distribution channels. Evaluate your sales volumes by gross profits. You might find that your products with the lowest margins have such high sales, they generate the biggest gross profit for you.
Cost of Goods Sold
In addition to production and overhead costs, businesses determine their cost of goods sold to learn the total costs to sell a product that are not related to administrative overhead. For example, administrative overhead such as rent, insurance and office supplies don’t change with your sales volumes. Costs of goods sold such as marketing, sales rep salaries, wholesaler commissions, materials to make your product and manufacturing labor all relate directly to making and selling your product. Knowing the total cost of the goods you sell help you better target cost-reductions if you can’t trim administrative overhead. You might find that selling another 1,000 units of your product might require expenses such as a second shift, more delivery runs, extra commissions or additional marketing that don’t justify selling these extra 1,000 units.
Break Even
Knowing your overhead and production expenses and costs of goods sold helps you determine at what sales volume each product breaks even. Knowing your break-even point can help you determine whether to launch a new product, when to drop one and the effect of your sales beyond break-even on your profits and taxes. This can help you better set pricing strategies.
Define Sales Analysis
Sales analysis examines sales reports to see what goods and services have and have not sold well. The analysis is used to determine how to stock inventory, how to measure the effectiveness of a sales force, how to set manufacturing capacity and to see how the company is performing against its goals.
Period Comparisons
Usually a sales analysis will compare one time period to a comparable period in the past. For example, clothing retailers might want to examine how their back-to-school sales did compared with last year. They might take a look at this year's sales from Aug. 1 through Labor Day and then compare those numbers to the same period a year ago. Other companies look at month-over-month sales, or sales this month compared with the same month last year, or some other time period, depending on the nature of the business.
Break-Even Analysis
Break-even analysis shows a company what minimum level of sales is needed to make sure it does not lose money. It also shows how sensitive the break-even point is to changes in both fixed and variable expenses.
Competitor Sales Analysis
In some industries, sales made by your competitors are listed in public sources. For example, automobile sales are reported monthly by major manufacturer, major brand and model. This sales data are informative for all manufacturers, showing how well each competes against the rest. For example, data are routinely examined to see which automobile company sold the most midsized sedans, SUVs and trucks.
Context for a Sales Analysis
The raw year-over-year numbers or percentage increases or decreases in sales are typically paired with additional explanatory notes in the sales analysis. For example, the automotive manufacturer that reports a large year-over-year increase in sales for one of its midsized sedans could have just introduced a new sedan that is stealing sales from other manufacturers. Or back-to-school sales for retailers may be down compared with last year because of a recession. The sales analysis needs context to be fully understood by all who will use it.
Sales Analysis Review
Any sales analysis needs to be shared with members of the company who can benefit from having the knowledge. The sales force needs to be aware of how it is doing against its goals, finance needs to be able to analyze the company pricing strategy and its impact on sales, and manufacturing needs to be able to plan capacity. Sharing the sales analysis works best if it is done in regularly scheduled meetings where people can ask questions, share information and plan accordingly for the next sales cycle.
Sales Variances Analysis
Companies regularly analyze sales variances to explain revenue performance over a monthly, quarterly or yearly accounting cycle. The resulting sales variance explanations help firms isolate problems and gear their future sales and marketing efforts towards increased sales growth. The sales variance analysis relies on a comparison benchmark -- usually a firm's sales budget. Fluctuations in actual versus budgeted sales may have several explanations, requiring diligent analytical work to reveal the underlying causes.
Sales Price and Production Variances
When reviewing past sales results, an analyst compares them to budgeted, or estimated, sales performance for the company. When results do not line up, the analyst must find a plausible and meaningful explanation. Differences in the volume of products sold, for example, may cause sales variances between budget and actual results. Variance in sales prices may also cause or contribute to variances, such as when a company needs to drop prices to sell enough volume to meet its budget goals. Additionally, the budget may have a planned output of 10,000 units, while in reality the company exceeded production expectations by producing 15,000 units.
Product Mix
Companies selling more than one type or style of product may experience sales variances stemming from an inaccurately projected product mix. Companies assemble budgets using different methods; if a revenue budget uses percentages to allocate budget expectations for revenue expected from various products, variances can occur if the business did not allocate the product mix effectively. Consumer trends or changing preferences are two external factors that may drive product sales variances against the company's budget.
Related Reading: The Role of Variance Analysis in Businesses
Marketing Programs
When companies invest money and effort in marketing programs, they have no guarantee of increased sales. As consumer preferences change, a previous year's marketing campaign may not bring the same product sales results, causing variances from a budget based on historical results. Conversely, a new or especially effective marketing program may outperform budgeted expectations, causing a sales variance.
Market Share
Firms have no control over the competition, and may experience an unplanned decline in sales market share if competitors introduce strong marketing campaigns or new products. New competitors may also reduce an existing company's market share more the company anticipates, reducing the firm's sales and causing a budget variance.
Economic Conditions
Even when firms tailor budgets to account for changes in the economy, no business can accurately predict the effects of these changes all of the time. Economic unrest, especially for companies selling products or services that consumers do not consider a basic need, can cause volatile sales and larger-than-expected changes in sales performance. This may lead to sales variances against the company's budget.
The Role of Variance Analysis in Businesses
Variance analysis, also described as analysis of variance or ANOVA, involves assessing the difference between two figures. It is a tool applied to financial and operational data that aims to identify and determine the cause of the variance. In applied statistics, there are different forms of variance analysis. In project management, variance analysis helps maintain control over a project's expenses by monitoring planned versus actual costs. Effective variance analysis can help a company spot trends, issues, opportunities and threats to short-term or long-term success.
Budget vs. Actual Costs
Variance analysis is important to assist with managing budgets by controlling budgeted versus actual costs. In program and project management, for example, financial data are generally assessed at key intervals or milestones. For instance, a monthly closing report might provide quantitative data about expenses, revenue and remaining inventory levels. Variances between planned and actual costs might lead to adjusting business goals, objectives or strategies.
Materiality
A materiality threshold is the level of statistical variance deemed meaningful, or worth noting. This will vary from company to company. For example, a sales target variance of $100,000 will be more material to a small business retailer than to a national retailer accustomed to generating billions in annual revenues. Conversely, a 2 percent cost overrun might be immaterial for a small business but translate into millions of dollars for a large company.
Related Reading: What Does an Unfavorable Variance Indicate?
Relationships
Relationships between pairs of variables might also be identified when performing variance analysis. Positive and negative correlations are important in business planning. As an example, variance analysis might reveal that when sales for widget A rise there is a correlated rise in the sales for widget B. Improved safety features for one product might result in sales increases. This information might be used to transfer this success to other similar products.
Forecasting
An important type of prediction is business forecasting. It uses patterns of past business data to construct a theory about future performance. Variance data are placed into context that allows an analyst to identify factors such as holidays or seasonal changes as the root cause of positive or negative variances. For example, the monthly pattern of sales of television sets over five years might identify a positive sales trend leading up to the beginning of the school year. As a result, forecasts for television sales over the next 12 months might include increasing inventory by a certain percentage — based on historical sales patterns — in the weeks before the start of local universities' fall term.
What Does an Unfavorable Variance Indicate?
Accountants can use standard costing to identify variances in business operating statistics. Variance analysis can help a business narrow in on areas of operations that aren't performing as they should be. Once a business identifies an unfavorable variance, they can further examine department results and talk with department employees to understand why the variance is happening.
Variance Overview
Accountants perform standard costing by comparing expected costs with actual costs and analyzing the differences. Accountants usually examine direct labor costs, direct product costs and overhead costs when determining variances. If the actual costs are less than the expected costs, the business has a favorable variance. If costs are higher, there's an unfavorable variance. Accountants perform standard costing calculations periodically to help managers stay on budget, determine inventory costs and help management price products.
Unfavorable Labor Variances
Unfavorable labor variances occur when the wages and costs associated with labor are higher than expected. There are a variety of factors that can cause an unfavorable labor variance. Employee pay structures and skill levels can create unfavorable variances. Newly minted workers may receive less pay than their experienced counterparts, but they most likely are less efficient. Poor scheduling can also cause employee overlaps and inefficiencies. Product materials could also be a culprit. If the business bought lower-quality materials to save on product costs, it can slow down the employees creating the products.
Unfavorable Product Variances
Unfavorable product variances generally come in one of two categories. Either the business uses more material than expected to create a product, or material prices are higher than expected. The first scenario, dubbed a "material yield variance," often stems from buying poor-quality materials. If some material spoiled during handling and storage, yield can also go down. Higher material pricing can occur if there's an industry shortage of the material, if the unit had to place expensive rush orders or if prices recently changed due to a new supplier.
Unfavorable Overhead Variances
Along with product costs and labor costs, accountants must allocate fixed overhead expenses to inventory cost. If overhead costs are larger than expected for the volume of product the business produced, there is an unfavorable volume variance. Fixed overhead expenses tend to remain relatively stagnant, and businesses don't usually experience significant variances in this area. However, if property tax, insurance costs, manager salaries or depreciation rose unexpectedly, it can create an unfavorable variance.
Schedule Variance Vs. Cost Variance
Variance analysis is key to the success of any project. When businesses place bids to win contracts, projected schedules and costs are required. They key to winning the project is presenting the best bid; the key to winning future projects -- not to mention earning a good reputation within your industry -- is keeping the project on time and within budget. Variance analysis quickly shows project managers where the project is running astray.
Schedule Variance
Keeping a project on schedule is not only important from a time standpoint but also to avoid future cost overages. When a project loses site of its scheduled work, overtime -- or even double-time -- often is required to finish the project by the completion date. This can run project costs significantly over budget. Keeping a project on schedule is also important when sending the client project status reports. The client wants to know two things: Is the project on schedule, and is the project under budget? Schedule variance analysis shows the project manager whether the project is on schedule and, if not, how far it has fallen behind schedule. The manager can then correct the scheduling issue and present the solution with the status report, demonstrating to the client that the situation is already under control.
Cost Variance
Cost variance analysis is equally important to schedule variance analysis because project costs obviously need to stay within the budget. It is disastrous for both the company and its client if project costs exceed budgeted values. Unless there is a good explanation for the overage, the client is left with a poor impression of the company it hired to complete the project -- not to mention less money in its pocket. Cost variance analysis compares the budgeted costs of the project to the actual costs of the project by line item. This can quickly tell a project manager the portion of the project budget that is over the original estimated amount. For example, if the company budgeted a certain amount of money to cover the project license and permit costs and the county in question raised the fees unexpectedly, the "License and Permits" budgeted line item will show a cost variance that is over budget.
Calculating Schedule Variance
To calculate schedule variance, accountants take the project's planned value and subtract it from the project's earned value. A project's earned value takes the scheduled amount of work and compares that with the actual work completed to date; planned value assesses the cost of the scheduled work budgeted in comparison to the cost of the work actually completed to date. So, earned value looks at hours, and planned value looks at costs. A positive result, which is when the project hours do not exceed the project costs to date, present a schedule variance that indicates the project is on schedule. A negative result, which is when the project costs exceed the project hours, present a schedule variance that indicates the project is behind schedule because the amount of work actually paid for exceeds the amount of scheduled work performed.
Calculating Cost Variance
Cost variance is much easier to calculate as the accountant simply takes the earned value of a line item and subtracts the actual cost of the line item. Taking the license and permit costs example discussed previously, if the company projected this line item at $5,000 and the actual costs were $5,500, the cost variance for this line item in the budget would be negative $500, showing this budgeted line item is $500 over the projected costs. If the budgeted permits and licenses actually cost $4,500, the cost variance would show a positive $500, showing the actual cost was $500 under budget -- a result any client would appreciate.
What Is a Factory Overhead Cost Variance Report?
Controlling your manufacturing expenses starts with identifying your factory overhead costs. These are all the expenses other than the direct materials and direct labor used to produce your merchandise. You track the factory overhead costs as your inventory moves through the production line. The factory overhead cost variance report compares the actual fixed and variable costs against the standard fixed and variable costs. This lets you know whether your actual costs exceed the standard costs after each production run.
Factory Overhead Components
Factory overhead expenses are divided into fixed and variable costs. Factory overhead costs are also known as manufacturing overhead costs and indirect production costs. Fixed factory overhead expenses are long-term costs that do not change no matter how many units are produced. Typical fixed factory overhead costs include rent, depreciation and property taxes. Variable factory overhead costs can change with each production run. Variable factory overhead costs include indirect labor, utilities, supplies and parts.
Actual Overhead Costs
The actual factory overhead costs are the dollars and cents of indirect expenses you incur to manufacture your product. You must calculate the actual total costs and the actual cost per unit and include them on your factory overhead variance report. For example, your total actual variable costs are $5,000, the actual fixed costs are $10,000 and you produce 5,000 units for the period. Divide the $5,000 variable overhead costs by 5,000 units to get the actual variable factory overhead cost of $1 per unit. Divide the $10,000 fixed costs by 5,000 units to get the actual $2 fixed factory
Standard Overhead Costs
Your standard factory overhead costs are budgeted factory overhead amounts. The standard factory overhead costs remain fixed over the long term and serve as a benchmark for measuring your actual overhead cost variances. You calculate your standard per unit cost using your budgeted figures. For example, your budgeted fixed costs are $12,000, budgeted variable costs are $4,000, and the budgeted production is 4,000 units. Your standard fixed factory overhead cost is the $12,000 budgeted cost divided by 4,000 projected units, or $3 per unit. The standard variable factory overhead cost is the $4,000 budgeted cost divided by 4,000 projected units, or $1 per unit.
Variance Report Uses
The factory overhead cost variance report compares the actual and standard fixed and variable factory overhead cost per unit. The standard fixed and variable factory overhead costs per unit are usually listed underneath the actual costs. For example, if the actual factory overhead costs are $3.50 per unit and the standard factory overhead costs are $3.80 per unit, you have a favorable factory overhead cost variance of 30 cents. If the actual factory overhead costs are more than the standard factory overhead costs, you have an unfavorable cost variance. In this case, you want to investigate why your actual costs are more than your standard costs.
How Does a Predetermined Factory Overhead Rate Help Managers?
A predetermined factory overhead rate acts as a benchmark for your indirect production costs. It gives you a way to measure if your factory overhead costs are running high or low for that particular production run. Predetermined factory overhead rates can be based on your direct labor hours, machine hours or units of production. You can also determine a predetermined factory overhead rate based on the actual factory overhead costs from similar jobs you recently completed. Using a predetermined factory overhead rate gives you greater control over your costs of production.
Factory Overhead Components
Factory overhead is the indirect costs of manufacturing your products. This includes the salaries paid to production supervisors and quality control supervisors, rent, utilities, building insurance, supplies and small tools. Your equipment set-up costs, maintenance and repair costs likewise belong to factory overhead. These costs cannot be matched against a specific production run or product. Instead, the costs are pooled and spread evenly over the total number of units produced.
Establish Uniform Per Unit Cost
Using a predetermined factory overhead rate ensures that the same amount of indirect cost is applied to each unit produced. This prevents your production costs from being skewed due to seasonal fluctuations or unusual changes in demand. Otherwise, jobs completed during a slack period would show abnormally high costs compared to those completed during times of heavy production. You would also have large price variations as you adjusted your selling price to cover your costs. This would make bidding on a project almost impossible since your overhead cost basis would change with each job.
Identify Factory Overhead Variance
The difference between your predetermined factory overhead costs and the actual costs is your factory overhead variance. If your actual costs are greater than the predetermined costs, you have an unfavorable factory overhead variance. You want to find out what is causing your actual factory overhead costs to be higher than your predetermined costs. If your actual costs are less than the predetermined costs, you have a favorable variance. Your actual costs are lower than your predetermined factory costs. By discovering why your costs are lower than expected, you can make cost-cutting changes to increase your profits.
Adjust Production
Using a predetermined factory overhead rate lets you know the costs and profits associated with producing your products. Use the information to compare the costs against the profit margin for each product. You can increase your production of the more profitable products and reduce production on those with a lower profit margin. Update your predetermined factory overhead rate to keep it current based on long-term changes in production costs.
What Is Included in Figuring Out the Predetermined Overhead Rate for Manufacturing?
A company will incur a number of costs associated with the production of a product. Some costs are considered direct costs, while others are considered indirect costs. Costs that cannot be traced to a specific unit or product are generally considered part of the overall overhead costs of production. General accounting principals allow you to calculate the predetermined overhead rate by following a simple formula.
Why Is the Overhead Rate Important?
Determining the overall cost of producing a product is essential for two principal reasons: First, the overall cost helps a company decide whether producing the product will be feasible from a financial standpoint; in addition, the overall cost of production will directly determine the price point for selling the product once it has been produced.
What Is Included in the Overhead Rate
Some costs associated with producing a product can be traced specifically to each unit produced, while others cannot. Costs that cannot be attributed to a unit of production are considered part of the predetermined overhead rate. Examples of costs that are part of the overhead rate include rent, some wages and supplies that support the manufacturing process as a whole. To help better understand overhead costs, imagine that your company plans to produce a line of athletic shoes. Since it is impossible to determine how much of the cost of the rent, wages of management personnel or cleaning supplies is attributable to a specific pair of shoes produced, those costs are considered part of the overall predetermined overhead rate.
What is Not Part of the Overhead Rate
Conversely, direct costs are costs that can be attributed to the manufacture of a specific unit or product. Direct costs may include hourly wages, materials and machine hours. Using the athletic shoe example, the wages of employees who are assigned to a specific machine or task all day can be attributed to a specific product. In addition, materials that are used only to manufacture a specific shoe, as well as machine hours used to produce a specific shoe, can be calculated with more specificity and are therefore considered direct costs.
Calculating the Overhead Rate
The predetermined overhead rate is calculated by dividing the amount of the total indirect costs by the amount of labor hours anticipated to produce the product. For example, if the indirect costs for producing athletic shoes is $100,000 and the number of human or machine hours used to produce the shoes is 10,000, then the predetermined overhead rate for producing the shoes is $10. To that, you can add any direct costs to arrive at the total cost for producing the shoes. If your direct costs are $15, for instance, then the total cost to manufacture the shoes is $25. From this, a company can determine whether production will be profitable and how much to charge for the shoes.
Reasons for Predetermined Overhead Rate
Establishing a predetermined overhead rate for your business can give you a tool to help keep expenses in proportion with sales and production volumes. Monitoring a well-defined rate provides a quick signal that lets you know when it's time to review spending and, in doing so, will help you protect your profit margins.
Calculating an Overhead Rate
An overhead rate is calculated as an estimated production cost divided by an estimated allocation base. For example, a factory with an expense budget of $200,000 and an annual payroll of $100,000 would be calculated as $200,000 of factory expense divided by $100,000 of labor base, yielding a 200 percent predetermined overhead rate (calculated as $200,000/$100,000 = 2 x 100 = 200%).
Measuring Expenses to a Corresponding Base
What makes this calculation important is that it provides a measurement of expense relative to a corresponding base. Imagine if you established an initial expense budget of $200,000, a payroll budget of $100,000 and a sales forecast of $400,000 -- with a targeted profit margin of $100,000 for the year. Then imagine experiencing a lower sales volume at $250,000 and, therefore, a lower production payroll at $75,000. If you're still tracking expenses against a $200,000 budget, you may easily be deceived into thinking your spending is on track. However, in reality, $250,000 of sales less a $75,000 payroll and $200,000 of expenses would calculate to a $25,000 loss.
Monitoring Relative Expenses
The beauty of a predetermined overhead rate is that is gives you a percentage to monitor on a weekly, monthly or quarterly basis, with the amount of expense and base being relative and proportionate to one another at any given moment in time. You can use production labor as your base, or choose other bases that are relevant to your business such as production hours, machining hours or production materials. For example, you can monitor the percentage of labor benefits, production supplies and utility expense to the amount of labor spent in a given period.
Monitoring the Overhead Rate
A prudent business manager would not wait until the end of the year to calculate their actual
overhead rate. Rates should be calculated on a periodic basis and compared to the predetermined rate as way to monitor expenses throughout the year in relation to corresponding production bases. To monitor an overhead rate, actual costs are tabulated at a given time and the actual overhead rate is calculated in the same fashion as the original budget. In the example above, $200,000 of actual expenses divided by $75,000 of actual labor would yield an actual rate of 267% (calculated as $200,000/$75,000 = 2.67 x 100 = 267%).
Examining Expenses
If the actual overhead rate exceeds the predetermined rate, it's time to start examining expenses. The quickest way to review them is to list all expenses in descending dollar value order. Then research the details of the most expensive items first. Doing this on at least a monthly basis will give management a good sense of where the most money is being spent and will allow time to make spending adjustments, as necessary, to keep the actual rate in alignment with the predetermined rate.
Everyone has heard of some family acquaintance who worked on commission and went broke. This is rarely the case in distribution. The nature of customer buying habits and market dynamics indicates 99 percent of all selling territories produce revenue in good times and bad times. From the worst recession to the best of times, a territory might fluctuate by 30 percent. The secret is to live within your means, bank the upward swings and prepare for downward shifts if the economy should fall into recession. Further, as you build customer relationships, develop your problem solving skills and increase your efficiency, the whole thing moves in the upward direction.