Understanding and effectively managing revenue is crucial to a business’ success. However, it’s not always easy to understand the factors that drive revenue growth or decline. This is where the concept of revenue bridge comes into play, acting as a strategic compass for businesses seeking to really understand their revenue streams and make more informed decisions.
In this article, we’ll explore what exactly revenue bridge is, and why it holds a pivotal role in financial planning and analysis. Whether you’re a seasoned financial analyst or a business owner looking to gain a deeper understanding of your company’s revenue dynamics, this guide will equip you with the knowledge and tools you need.
What is revenue bridge?
In the context of finance and business analysis, a revenue bridge is a visual and analytical tool. It breaks down and explains changes in a company’s revenue from one period to another, offering a detailed view of the factors contributing to revenue changes and aiding businesses in understanding their financial performance.
What does revenue bridge show?
Here’s how a revenue bridge typically works:
- Starting point: It begins with the revenue figure for the starting period, which could be a quarter, a year, or any other relevant time frame.
- Ending point: This represents the revenue figure for the ending period, often compared to the starting point to assess the change.
- Bridge components: The bridge breaks down the change in revenue into various components or factors that influenced the change. These components can include:
- Volume changes: Changes in the quantity or volume of products or services sold. For example, this may result from increased sales.
- Price changes: Adjustments in the prices of products or services. For example, this may be due to price increases.
- Product changes: Changes in the type of products or services sold. For instance, selling more high-margin products or shifting to lower-margin items can impact revenue.
- Currency effects: For international businesses, fluctuations in exchange rates can affect revenue when converting foreign currency sales into the company’s reporting currency.
- Acquisitions or divestitures: If the company acquired or sold other businesses during the period, these transactions can have a significant impact on revenue.
- Organic growth: This reflects the growth achieved by the company’s existing operations, excluding any changes due to acquisitions or divestitures.
- Seasonal variations: Some businesses experience revenue fluctuations during specific seasons or periods, which are highlighted in the bridge.
- Other factors: Any other specific factors or events that influenced revenue during the period.
- Total impact: The bridge concludes with a sum of all these components, which should equal the overall change in revenue between the starting and ending periods.
How to make a revenue bridge chart
Creating a revenue bridge chart involves visualizing the changes in revenue and the various contributing factors using a graphical representation. You can track your revenue with enormous accuracy in Brixx, however we have put together a step-by-step for starting in a spreadsheet. Here’s a step-by-step guide on how to make a revenue bridge chart:
- Gather data:
- Collect data on your revenue for two different periods (e.g., quarter-to-quarter or year-to-year).
- Identify and collect data for the contributing factors that impacted revenue during these periods, such as changes in volume.
- Set up a spreadsheet:
- Open a spreadsheet program like Microsoft Excel or Google Sheets.
- Create a table with columns for the following:
- Revenue for Period 1 (Starting Revenue)
- Revenue for Period 2 (Ending Revenue)
- Each contributing factor (e.g., Changes in Price, etc.)
- Total Impact (to be calculated)
- Input data:
- Enter the revenue figures for both periods into their respective columns.
- Input the data for each contributing factor into the corresponding columns.
- Calculate Total Impact:
- Create a formula in the Total Impact column that sums up all the contributing factors. The formula should look like this (assuming your contributing factors are in columns C to H):
- =SUM(C2:H2)
- Create a formula in the Total Impact column that sums up all the contributing factors. The formula should look like this (assuming your contributing factors are in columns C to H):
- Create the chart:
- Highlight the data in your table, including the labels.
- Go to the “Insert” or “Chart” menu in your spreadsheet program and select a column chart or bar chart.
- Customize the chart:
- Label the x-axis with “Factors” and the y-axis with “Revenue Change.”
- Format the chart to make it visually appealing. You can adjust colors, add data labels, and customize the legend.
- Add data labels:
- If your chart doesn’t automatically display data labels, you can manually add them to each bar or column. These labels will show the specific value associated with each factor.
- Title and legend:
- Include a title for your chart, such as “Revenue Bridge Analysis.”
- Add a legend to explain what each bar or column represents.
- Interpretation:
- Make sure to include a brief explanation or description of the chart in your document or presentation. Highlight the key takeaways and insights gained from the revenue bridge chart.
- Update as required:
- Keep your chart and data up to date if you want to use it for ongoing financial analysis. As new data becomes available, update the spreadsheet and chart accordingly.
By following these steps, you can create a clear and visually informative revenue bridge chart to illustrate the factors affecting changes in revenue between two periods. This chart can be a valuable tool for financial analysis and decision-making within your business.
What is the importance of a financial bridge analysis?
Financial bridge analysis holds significant importance for businesses and financial professionals for several reasons:
Understanding revenue and expense drivers
Bridge analysis helps break down complex financial changes into their constituent factors. For revenue, it reveals the drivers behind growth or decline, such as changes in sales volume. For expenses, it can shed light on what is driving cost increases or reductions, allowing businesses to make informed decisions.
Strategic decision-making
By identifying the specific factors contributing to changes in revenue or expenses, companies can make more strategic decisions. For example, if a business sees that a price increase led to revenue growth, it may decide to implement similar price changes in the future.
Performance evaluation
Businesses can use bridge analysis to evaluate the effectiveness of specific strategies or initiatives. For instance, if a marketing campaign aimed at increasing sales volume didn’t yield the expected results, the bridge analysis can highlight this and guide adjustments.
Budgeting and forecasting
Bridge analysis can be applied to budgeting and forecasting processes. It helps businesses create more accurate forecasts by considering the expected impact of various factors on revenue and expenses.
Investor relations
Publicly traded companies often use bridge analysis in their financial reports and earnings releases. It helps explain financial performance to investors and analysts, enhancing communication and potentially influencing investment decisions.
Accountability
Bridge analysis can be a tool for holding departments or teams accountable for their financial performance. It provides a clear picture of how different parts of the business contribute to overall results.
Continuous improvement
Bridge analysis encourages a culture of continuous improvement. By regularly dissecting financial changes, businesses can learn from past experiences and apply those lessons to future decision-making.
In summary, financial bridge analysis is a valuable tool for dissecting financial changes, understanding their underlying causes, and making data-driven decisions. It promotes transparency, strategic thinking, and informed financial management, ultimately contributing to the overall success and sustainability of businesses.
Are there challenges in implementing financial bridge?
Yes, there can be challenges in implementing financial bridge analysis. While it is a valuable tool for dissecting financial changes and understanding their drivers, several challenges may arise during the implementation process. Here are some common challenges:
Data availability and accuracy
Gathering accurate and comprehensive data for all the contributing factors can be challenging. Incomplete or inaccurate data can lead to incorrect conclusions and decisions.
Data integration
For larger businesses with complex data systems, integrating data from various sources into a unified format for bridge analysis can be a technical challenge. This is where a financial tool with built-in integrations can help.
Complexity
Financial bridge analysis can become complex, especially when there are numerous factors affecting revenue or expenses. Managing and analyzing a multitude of variables can be daunting.
Subjectivity
Determining the exact impact of certain factors, such as changes in consumer sentiment, can be subjective and open to interpretation.
Time and resources
Preparing and maintaining financial bridge analysis can be time-consuming. It may require dedicated resources and tools to automate the process efficiently.
Frequency and consistency
To gain valuable insights, financial bridge analysis should ideally be performed regularly and consistently over time. Ensuring that this happens can be a challenge, especially in businesses with dynamic environments.
Causation vs. correlation
Distinguishing between causation and correlation can be challenging. Just because two factors change at the same time doesn’t mean one caused the other.
Resistance to change
Employees and stakeholders may resist changes recommended based on the analysis, especially if they perceive it as a threat to their current roles or practices.
Despite these challenges, financial bridge analysis remains a valuable tool for businesses to gain insights into their financial performance and make informed decisions. Overcoming these challenges often involves a combination of data management, analytical skills, effective communication, and a commitment to continuous improvement in financial analysis processes. This of course can be managed by an external consultant, a professional accountant with experience.
Can a financial modelling tool help with revenue bridge?
The right financial modeling tool can be extremely helpful in creating and analyzing a revenue bridge. Financial modeling tools are designed to handle complex financial calculations and scenarios, making them well-suited for tasks like this.
We have listed just some of the ways that Brixx can help you to track your revenue.
- Data management: Brixx allows easy input of data and can manage large datasets efficiently.
- Automation: Brixx will automate calculations needed for revenue, incorporating various factors through scenario planning.
- Scenario analysis: Brixx can create different scenarios to assess the impact of various assumptions on revenue.
- Graphical visualization: Brixx has easy to read charts and dashboards to represent revenue – all generated with just one click!
- Historical data: Brixx integrates with tools like Xero Accounting to bring in historical data and assist in revenue tracking.
- Sensitivity analysis: Brixx can perform sensitivity analysis by changing assumptions and seeing how they affect revenue.
- Scalability: Brixx can handle models of various sizes and complexities, from small business revenue analyses to large-scale corporate financial models.
- Collaboration: Brixx supports and has easy-to-share collaboration, allowing multiple team members to work on the same model.
- Reporting: You can generate reports and summaries directly from Brixx, streamlining the communication of your revenue bridge analysis results to stakeholders.
Using a financial modeling tool can enhance the accuracy, efficiency, and flexibility of your revenue bridge analysis, allowing you to gain deeper insights into the factors affecting your company’s revenue performance.
