What Are Organic Sales?
Organic sales are revenues generated from within a company. These sales stem directly from the firm’s existing operations rather than through the acquisition of another business or company. Similarly, any sale or disposal of business lines is netted out to derive organic sales. Measuring organic sales is crucial as it reflects the growth resulting directly from a company’s business plan or sales strategy, highlighting the health and effectiveness of the company’s core operations.
Key Takeaways
- Organic sales are earnings generated internally from the firm’s operations.
- They exclude sales growth caused by acquiring other companies within the past year.
- These figures are vital as they reveal the growth stemming from the company’s core operations.
Ascend through Organic Sales
Organic sales are derived solely from the internal processes of a company, offering a clear view of revenue created by selling the company’s own products and services. Revenue growth from organic sales, often termed as organic growth, displays an entity’s year-to-year performance or, in some instances, from one quarter to another.
Organic Sales Growth Strategies
Companies might achieve organic sales growth through various internal strategies, such as:
- Introducing new products and services
- Running targeted marketing campaigns to attract customers
- Optimizing internal processes to enhance efficiency
- Implementing new sales strategies including performance-based incentives
- Reallocating resources to focus on high-demand products or services
Comparing Organic Growth to Inorganic Growth
While organic growth aims at improving existing operations, sales growth from acquisitions results from a company purchasing another business. This often leads to quick revenue growth but is categorized as inorganic growth. Such growth helps companies tap new markets or expand their product offerings but may cause operational disruptions. When acquisitions occur, it’s crucial to differentiate between organic and acquired sales.
For instance, if a car parts manufacturer reports 4.5% sales growth, with 2.5% from an acquisition and 2.0% from organic sales, separating these figures understates the pure growth from existing operations. Once fully integrated, sales from acquisitions will transition to part of organic sales.
Advantages of Focusing on Organic Sales
For investors, clearly distinguishing organic sales from externally sourced revenue is vital. It shows how much income stems strictly from the company’s fundamental operations and allows better performance assessment. Breakdown includes growth segmentation, profit margins, changes in working capital, cash flow generation, and resource efficiency. Also, executive compensations are often linked to organic sales performance.
Real World Illustration: PepsiCo
In industries where acquiring new entities boosts growth models, companies like PepsiCo provide clear examples. By Q1 of 2020, despite having acquired Rockstar Energy Beverages in 2019, PepsiCo reported an organic revenue growth of 7.9% compared to Q1 of 2019. This figure emphasizes the robust growth of Pepsi’s core product lines without conflation from acquired sales.
Related Terms: sales, revenue, growth, acquisitions, return on assets (ROA), return on invested capital (ROIC), profit margins
References
- PepsiCo. “PepsiCo Reports First-Quarter 2020 Results”, Page 1.
