Types of revenue
There are multiple types of revenue. The most commonly used ones are gross revenue and net revenue.
Gross revenue is all income from a sale, with no consideration for any expenditures from any source. If a company sells 10,000 units of its newest product for $800 a piece, the gross revenue is $8,000,000. This is the simplest way to calculate your revenue, but it is not exactly accurate.
Net revenue is income from a sale after subtracting all the discounts and returns. Therefore if 2,000 of those units were sold with a 10% discount, and 10 units ($800 each) were returned, the net revenue will be: 8,000 × $800 + 2,000 × $720 – $8,000 = $7,832,000.
Revenue is often called the “top line” because it is at the top of an income statement. So, when a company has “top line growth,” the company is experiencing a rise in revenue. Top line growth is always the goal.
All sales are part of the revenue, regardless of whether they are from goods or services. Revenue only shows how effective a company is at generating sales and does not take into consideration the fees for production, shipping, and storage, which can significantly impact the “bottom line,” or income, which will be discussed later on.
Income vs revenue
On the other end, there’s the income (or profit), aka the “bottom line”, which shows how effective a company is with spending and managing its operating costs. Despite being called the bottom line, income is often used as a synonym for revenue because both terms refer to a positive cash flow. But in a financial context, the term income almost always refers to the total amount of earnings remaining after accounting for all company expenses.
This is a given, but income is an extremely important measure of the profitability of a company, despite the term sometimes being misused. This line is the second most important after the top line and tells you what money you have in the end. Income is also separated into gross and net income.
Gross income is all income from the sale, minus the cost of goods sold. Continuing our example with the 10,000 product units at $800 each, if the cost of the goods is $200 each (25%), then the gross income from those sales will be: $8,000,000 × 0.75 = $6,000,000.
Net income is all income from the sale, minus the total expenses associated with the production, shipping, storage, and sale of the product. If the company’s gross revenue is $8,000,000, it’s cost of goods sold is $2,000,000, and it’s total selling expenses are $1,500,000, the net income will be $4,500,000.
Net income goes further into determining the actual profits. However, gross and net incomes show the different sides of income and costs that affect it, and are used in different sides of business analysis.
How to calculate revenue
If your company sells only one product, calculating revenue is easy. If your company sells many products and/or services at different prices, you will simply have to use the equation multiple times with different variables for each product/service. Here’s how to calculate (gross) revenue:
Gross revenue = Units sold x Sales price
Gross revenue excludes things like discounts, refunds, product costs, or any other expenses, so it’s really easy to calculate. To calculate net revenue, you will need to know data like discounts and returns:
Net revenue = Units sold x Sales price – $ lost on discounts – $ lost on returns
Calculating gross income and net income is pretty easy as well:
Gross income = Gross revenue – Cost of goods sold
Net income = Gross revenue – Total expenses
Keep your records up to date and remember: revenue does not equal cash flow.
You have the numbers – what next?
Calculating your revenue is like giving yourself a divining rod for what direction to head next. It shows what you can do what you need to change. You can use it in many ways, all to help guide your company in the right direction. Here are a few examples of things you can do and analyze when you know your exact revenue and income:
- Evaluate the basics – immediate and future expenditures such as employee pay, inventory, suppliers.
- Plan for growth – use your revenue and income figures to decide if there is enough money to consider company growth. And if there is, grow!
- Analyze trends – how does your revenue from this year look like compared to last years? If it’s better, what did you do differently? If it’s worse, what changes can be made?
- Raise your prices – a clear picture of your revenue will help you see if you are undercharging. To decide on the fair market value of your product, you can start by looking at your profits vs. expenses.
The figurative bottom line
Your company’s revenue is hands down the most important and critical financial data you need to know. If you do not know how much money you are making, you cannot make decisions about your company or your products. Knowing your revenue helps you see your products’ worth and analyze whether you are underselling yourself.