Incremental Sales – Formula and Explanation

Sales growth is the increase in sales revenue over a set period. However, the increase in sales doesn’t always come at the same rate and percentage every quarter. Sometimes one quarter will grow faster than another. 

This is what we call incremental sales – the increase from one period to another. Incremental Sales are important for businesses because it shows how much additional revenue you can expect from your business moving forward. 

It also allows businesses to see whether their strategy is working or if adjustments need to be made sooner rather than later. Incremental sales can be calculated for a third party on any given company by finding their net sales over a certain period and dividing it by that same period again but with an earlier date this time (e.g., last year’s revenues divided by the first quarter of that year).

What are Incremental Sales?

They are the additional revenue your company generates after a certain period. In other words, incremental sales are the amount of sales revenue above and beyond what your company produced during the previous year’s period. 

For example, if your company generated $300,000 of revenue during the first quarter of this year but only $200,000 during the first quarter of last year, your company’s incremental sales are $100,000 ($300,000 – $200,000). 

This term is often used as a metric for growth in a company. It shows the increase in sales over time. If a company’s incremental sales are going up quarter after quarter, the business is likely doing well. If it’s not, then the company might need to make some adjustments to its strategy.

Why Are Incremental Sales Important?

As a business owner, you should know the incremental sales of your company to help you understand the overall growth of your business. You can also use incremental sales to forecast your expected revenue. 

There are a few ways to calculate incremental sales. You can find the net sales of your company for one period and then calculate what the net sales would be for a different period with a similar date. You can also find the net sales of your company for a certain period and then subtract the net sales from the same period in the previous year. 

With the information above, you can determine your company’s incremental sales and know how much additional revenue you can expect going forward. You can also see if your company’s strategy is working or if adjustments need to be made.

How to Calculate Incremental Sales

There are two ways to calculate incremental sales. 

First way

The first way is to find the net sales of your company for one period and then calculate what the net sales would be for a different period with a similar date. Let’s say your company made $200,000 in sales for the first quarter of this year. If you know that the first quarter of last year also had $200,000 in sales, then you can calculate your company’s incremental sales for the first quarter of this year. 

You would do this by taking the $200,000 in first-quarter sales from this year and subtracting the $200,000 in first-quarter sales from last year. This leaves you with $100,000 in incremental sales for the first quarter of this year ($200,000 – $200,000). 

Second way

The second way to calculate incremental sales is to find the net sales of your company for a certain period and then subtract the net sales from the same period in the previous year. Let’s say your company made $300,000 in sales for the first quarter of this year. 

If your company made $200,000 in sales for the first quarter of last year, you could calculate your company’s incremental sales for the first quarter of this year. You would do this by taking the $300,000 in first-quarter sales from this year and subtracting the $200,000 in first-quarter sales from last year. This leaves you with $100,000 in incremental sales for the first quarter of this year ($300,000 – $200,000). 

You can also calculate other periods to find your company’s incremental sales. For example, you can calculate your company’s incremental sales for the first and second quarters of this year by taking the net sales for the first and second quarters and subtracting the net sales for the first and second quarters of last year.

Limitations of Incremental Sales

While incremental sales are a useful metric for tracking your company’s growth, it’s important to note that where this metric sample of limitations to test, it only takes into account the net sales of your company. 

It doesn’t account for the total revenue your company brings in. If you’re tracking total revenue, you’ll want to use another metric, such as gross sales, to calculate incremental sales. Secondly, incremental sales don’t account for your company’s expenses. 

While you can use the metric to see how much additional revenue you can expect in the future based on current sales, it doesn’t account for your expenses. This can leave you with an inaccurate forecast.

Conclusion 

Overall, the incremental sale is useful for tracking your company’s growth. It shows the increase in sales over time and can help you forecast how much additional revenue you can expect from your business moving forward. While this metric has a few limitations, it can help you understand how much growth your company has experienced.