Quality of revenue, explained simply
A QoE asks whether profit is sustainable. A quality of revenue analysis asks the same of the top line. Growth driven by price increases to loyal customers is stronger than growth from new customers won with discounts or extended credit terms.
It is often performed alongside the QoE and relies on invoice-level sales data.
Revenue bridge, FY2024 to FY2025
IllustrativeAlder Creek Manufacturing, $ millions
Growth of 10% depends largely on new customers, several won on extended payment terms.
What the analysis examines
- Revenue by customer, product, channel and region
- Price compared with volume effects
- New, lost and existing customers
- Recurring compared with one-off sales
- Backlog and signed orders
Worked example
Alder Creek’s revenue grew from $38.2 million to $42.0 million. Price increases contributed $1.5 million, volume from existing customers $0.8 million and new customers $2.5 million, less $1.0 million from customers lost. Because a large part of the growth comes from new accounts, the buyer examines those accounts, their terms and their margins more closely.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Two companies with the same revenue can be worth very different amounts. The more predictable and diversified the revenue, the higher the multiple a buyer will usually pay.
Red flags
- Growth coming only from price with volume falling
- High customer turnover masked by new wins
- Large one-off orders presented as normal sales