Are you running a business? If you are in a business profession, then you might think about how to calculate revenue. The right approach to this calculation is critical to business and financial success. Here, we will lead the way for you on the same. However, before uncovering everything about revenue calculation, let’s understand its key facts.
Revenue is more than one type, and its calculation gets more complicated with business scale. A business owner must know what to do after calculating revenue data.
Now, we figure out the definition of revenue, sales revenue, total revenue, and their calculation process.
What Is Revenue?
Revenue is defined as the gross income amount that a company gains through product or service sales. The other name of the revenue is the “Top Line” of a company. The answer to how to find revenue is purely a calculation. To know revenue, multiply the total number of sales by the sales price. This is how it helps a firm to determine its business performance and its income.
The revenue formula will be as follows.
Revenue = Sales x Average Cost of the Service.
What Is a Total Revenue?
Total revenue is defined as the entire income produced from the total sales of goods and services, with no correlation to the revenue source. It is generated by investment, sales, marketing, or customer success. The total revenue is always higher than the sales revenue because it is a pile of entire revenue. So, the calculation of total revenue is high.
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How to Calculate Total Revenue?
It is crucial for any business to know the process of calculating total revenue. The reason behind this is gaining a high understanding of customer and price relationships.
Revenue is the total amount of money a business earns from its activities. To calculate revenue, use this formula: Revenue = Price per Unit × Quantity Sold
Revenue Formula Example
Suppose a corporation sells 100 units of bags for $10 each. The total revenue will be 100 x $10 = $1000.
This calculation is for one type of product. You need to separately calculate the revenue for each product or service in case of multiple products and services. After that, add them together to obtain the total revenue.
What Is Sales Revenue?
The sales revenue is completely defined from the total sales of goods and services. It only considers sales and doesn’t consider the income produced by other revenue streams. Here are some of the reasons to understand sales revenue.
- Financial planning
- Track the financial health of the company with a profit analysis
- Collecting market insights
- Tax compliance
- Determine investment chances
How to Calculate Sales Revenue?
The sales revenue formula is the number of units sold and their average price. Here, the crucial point to consider is sales revenue calculation is different in product-based and service-based businesses.
For service-based business
Sales revenue = Total number of units sold x Average sale price
For product-based business
Sales revenue = Number of units sold x Average price of unit
Example of Sales Revenue
Suppose a company sold 1000 buckets for $20 per piece. So, sales revenue will be calculated as follows.
1000 x $20 = $20,000
What Are the Mistakes To Avoid In Revenue Calculation?
Small business owners often do not deduct returns or refunds from their total revenue. But, it is a common mistake when calculating revenue. After subtracting the refund or returned amount, a business owner gets the actual earnings data.
Professionals also forget to include all types of revenue in the calculation. For instance, suppose a business professional does not consider non-operating revenue. He only observes operating revenue and underestimates total revenue. In this case, they can miss potential growth opportunities.
Net Revenue Vs. Gross Revenue
All revenues are not equal to each other. Professionals often don’t have a clear picture of net revenue and gross revenue. However, it could significantly affect the company’s income tax. Let’s understand the difference between net revenue and gross revenue here.
| Net Revenue | Gross Revenue |
|---|---|
| Net revenue is known as gross revenue minus returns and allowances. | Gross revenue is the total amount of money made by selling goods and services. |
| The formula to calculate net revenue is Net Revenue = Gross Revenue – (Returns + Allowance + Discount) |
The formula to calculate Gross Revenue is Gross Revenue = (Number of products sold) x (Price of those products) |
| It refers to the actual amount of money that a company earns. | It is the ability of a business to sell the products or service to generate income. |
Example of Net Revenue And Gross Revenue
Suppose ABC Computers is a big enterprise that sells computer parts. It includes a monitor, keyboard, and mouse costing $5000, $4000 and $3000. The quantity of those parts is 20, 10 and 30.
The gross revenue of each product will be as follows:
- For monitor – $5000 x 20 = $1,00,000
- For keyboard – $4000 x 10 = $40,000
- For mouse – $3000 x 30 = $90,000
Now adding these three revenue, we will get the total gross revenue as $100000 + $40000 + $90000 = $2,30,000
The company can now obtain its net revenue using the formula below: –
Net Revenue = Gross Revenue – (Returns + Discounts + Allowances)
We are assuming $90,000 as the value of returns + discount + allowance.
Net revenue = $1,40,000
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What Are The Types of Revenue?
After a deep insight into how to calculate revenue, let us understand the types of revenue.
1. Accrued and Deferred Revenue
Accrued and deferred revenue are the two essential categories of revenue. Accrued revenue is the revenue that a company receives for the service and goods but does not receive payment from the customer for the same.
In deferred or unearned revenue, the customer makes advance payment for the goods and services. The money is recorded as a legal responsibility until the goods or services reach customer satisfaction.
2. Operating Revenue
Operating revenue is the revenue made by goods and services sold. The utilization of operational revenue is analyzed from the revenue position.
3. Non-Operating Revenue
The extra-curricular activities of the company in generating revenue are known as non-operating revenue. For instance, suppose a company sells a product that is no longer in use and earns some money. This will come under non-operating revenue.
4. Recording Revenue
The earned revenue may not coincide with the exchanged money but is reported on the company’s financial statement. For example, some firms offer their products and services on credit. It means the customer will receive the product or service but make the payment later on.
The professional will then make a separate account on the balance sheet and include the revenue. This will decline when the customer pays the amount. The revenue will not get hiked because it was already mentioned.
What Is Income?
Income refers to the capital/money that a business receives after selling products or services. There are different forms of income as per the business nature and measurement of quantity. The different classifications of income are listed below.
- Gross income – It pertains to the total amount of the payment excluding any other deductions.
- Net income – Net income refers to income calculated after subtracting applicable taxes.
- Taxable income – This kind of income refers to revenue that is eligible for income tax. Sales and salaries come under this category.
Income is a crucial financial metric to identify business performance in the market. Maximizing the revenue streams and minimizing the expenses correspondingly is an efficient income management practice.
Revenue Vs. Income
Income and revenue are not identical to each other. Revenue is the total amount of money earned after selling products or services. Income is calculated by subtracting the expenses applicable to the business. The term income refers to net income or gross revenue.
The term “revenue” refers to the sale of goods or services. Professionals can also make money from sources which are not related to their main operation. This is known as interest on investment. Companies only disclose the net gain or loss from the non-operating income source.
What Are The Types of Income?
There are two types of income that companies can determine as per their operation.
1. Gross Income
Gross income or gross profit is a metric indicating the profitable level of a company’s goods or services. It is measured by deducting revenue from the goods sold. This income is the earning before tax deduction applicable to the operation.
2. Operational Income or Net Income
Operational income is obtained by deducting operating expenses from gross income. The entire indirect cost, essential for business running, is referred to as operating expenses. Net income is the profit remaining after deducting taxes and other non-operating expenditures.
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What Is the Use Of Revenue Calculation Data?
So for now you have set a clear roadmap for how to calculate revenue. But what to do with your revenue data? A simple answer is that you can unlock new opportunities with accurate revenue calculations.
Revenue data helps us to build a better plan for operating expenses for the future. The key points to include are employee wages, total inventory, and paying vendors. With the correct revenue calculation the company’s financial team can determine which business area needs capital investment. So, fund allocation becomes easy.
Company owners will get clarity on the amount you need to invest in upgrading your process, research, and development.
With revenue data, professionals can update their pricing strategy and maximize the same. Professionals can also predict whether they are charging too high or too low for their product or service. It also assists in checking the profit in comparison to the expenses.
A company can easily determine the areas that benefit from cutting down costs. It is easy to obtain a picture of which business areas are observing more investment.
Wrapping Up!
After a deep understanding of how to calculate revenue, we are winding up the session. Determining revenue is vital for small businesses. While calculating revenue, business owners must avoid common mistakes and incorporate automation.
Fortunately, Moon Invoice is the right platform to accomplish it. The platform puts forward plenty of templates to calculate revenue. Hence, saves time and effort with an effortless process for every business type.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
