What Are Organic Sales?
Let me explain organic sales directly to you: they're the revenues that come straight from a company's existing operations, without any boost from buying another business or selling off parts of your own in the past year. When you net out those acquisitions or disposals from total sales, what you're left with is organic sales. This metric matters because it reveals the growth that's truly driven by your business plan or sales tactics, not external deals.
Key Takeaways
Here's what you need to grasp: organic sales are purely from your company's internal efforts and core operations. They don't count revenue spikes from acquiring another firm in the last year. These figures are crucial as they highlight growth from what your business does best, without outside help.
Understanding Organic Sales
Organic sales stem from your company's internal processes, generated entirely within the firm. They give you and your investors a clear view of revenue from selling products and services. If you see an uptick in these sales, that's organic growth—usually tracked year-over-year, though some companies check it quarterly too.
Organic Sales Growth Strategies
You can drive organic growth through internal moves, like rolling out new products or services, launching targeted marketing campaigns to customers and prospects, or optimizing your processes by restructuring for efficiency. Consider implementing new sales strategies with incentives like commissions or bonuses for hitting targets, or shifting resources such as sales staff to high-demand areas. These approaches keep growth coming from within.
Sales Growth via Acquisition
On the flip side, acquired sales come from buying another business, leading to what's called inorganic growth. This can open doors to new markets or products, but integrating the acquisition takes time and might disrupt your organic sales through layoffs or department consolidations. That's why you should separate organic and inorganic sales in reporting. For instance, if a car parts maker reports 4.5% growth but 2.5% is from an acquisition, the real organic growth is just 2.0%. Once the acquired business is fully integrated, its sales count as organic. The same goes for divestitures—wait a full comparison period before equating organic to total sales.
Benefits of Organic Sales
You should separate organic sales from those gained externally because it shows revenue from core operations over time. Breaking down total sales this way lets you analyze fundamentals deeply, including growth in specific products or segments, profit margins that turn sales into profits, changes in working capital like cash from sales versus short-term debts, cash flow during periods, return on assets for asset efficiency in generating profits, and return on invested capital measuring profits beyond borrowing costs. Even executive pay might link to organic sales performance.
Real World Example of Organic Sales
Take big players in consumer staples—they've grown so much that acquisitions are key to their model. PepsiCo, a giant in beverages and snacks, often acquires assets, like its 2019 buy of Rockstar Energy. Yet in their Q1-2020 report, they showed 7.9% organic revenue growth over Q1-2019, excluding acquisition effects. This lets you see if lines like Pepsi drinks, Frito-Lay, and Quaker Foods truly grew on their own.
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