A sales index is designed to help managers track trends in their annual sales revenue totals. The sales index expresses the current year's sales revenue as a percentage of a base year's sales revenue. A sales index of over 100 indicates a year in which sales exceeded the base year's totals, while a number of less than 100 shows that the current year's sales under-performed in comparison to the base year. Managers can analyze sales index numbers to determine the success or failure of the company's overall sales strategies.
Selecting the Base Year
The key factor in creating a sales index is the selection of a base year. The base year acts as the measurement standard for future sales. The selection of the base year depends on the company's objectives when measuring the sales index. Start-ups might choose their first year as their base year. This enables them to follow sales trends since the company's inception. Businesses that have been operating for several years will often update their base year to a more recent period. This allows them to account for changes such as technology and inflation. Regardless of the criteria used to select a base year, it ultimately allows managers to set a sales goal for future years. For instance, managers at XYZ Software might choose 2009, in which the company earned $2 million in sales revenue, as its base year.
Calculating Yearly Sales Totals
The next step involves calculating the annual sales totals for each year after the base year. These annual sales totals form the basis for the comparison with the base year. The annual sales totals can be applied either by individual product or service, or reflect the company as a whole. In the XYZ Software example, suppose the annual company-wide sales totals were $2.1 million for 2012, $2.3 million for 2013, and $1.8 million for 2014.
Calculating Sales Index
The sales index is the ratio between the total sales revenue for a specific year and the total sales revenue during the base year. Each year after the base year will have its own sales index. From the XYZ Software example:
2012 Sales Index = [2.1M/2.0M] x 100 = 1.05 x 100 = 105
2013 Sales Index = [2.3M/2.0M] x 100 = 1.15 x 100 = 115
2014 Sales Index = [1.8M/2.0M] x 100 = 0.9 x 100 = 90
Uses for Sales Index
Managers can use the annual sales index to determine if the company is reaching its sales goals. In the XYZ Software example, the manager can see that sales were strong in 2012 and 2013, but took a sharp dive in 2014. On a broader scale, economists use sales index numbers to measure different sectors of the economy. For instance, if the sales index for the technology industry in 2014 was 120, then technology sales were booming that year. By comparison, if the 2014 sales index for the logging industry was 85, the industry is performing poorly.