Revenue is the first and foremost parameter for evaluating a business’s success. While any business can grasp revenue, understanding its definition, calculation process, and essentiality is complex. Most significantly, you must know how to calculate revenue correctly.
What is Revenue?
Before you understand how to calculate revenue, you should have a comprehensive idea of what revenue is. In simple terms, revenue is the money a business generates from its operations, such as gross sales of its products and other income sources.
How to Calculate Revenue?
You have to multiply the average sales price of your product by the number of units sold. This is how you can calculate the revenue for your business.
For instance, the revenue of a car dealership is the combined sales price for all the cars it has sold in a given time, like a week or a month.
As an essential metric, revenue is distinguished from other crucial metrics like gross revenue, operating income, and total profits. The net profits, on the other hand, is the amount of money you can consider as profit based on the sale of your products.
Irrespective of your product numbers or their prices, there is a simple formula to find your revenue.
Apart from the general formula, companies often use different formulas for revenue calculation.
A basic revenue formula is:
(Unit price x quantity sold) – allowances – discounts – returns = Net revenue
Discounts are the prices you reduce from the actual product price when selling.
Allowances are the benefits you offer to customers, like store credit.
Returns are what you pay back to your customers.
Net revenue is what you want to find.
For instance, you have sold 70 glasses for $50 each. Your revenue is $3,750.
If a customer returns 10 glasses as he doesn’t need them, subtract $500 from $3,750. So, the new total of your net revenue is $3,250. Remember, it’s only revenue, not profit or income.
Types of Revenue
The equation for revenue varies, as you can calculate different types of revenues for your business.
Corporate revenue has different subdivisions based on the number of products earning revenues. Suppose you have a restaurant. You can divide your revenue to be analyzed by categories like your main dishes, side dishes, and beverages.
A company can also distinguish its revenue by separately analyzing the cash flow from tangible and intangible products and services.
Tangible products are those which you can sell physically to customers. Intangible products are mostly services, like the cloud and the internet.
You can also divide your revenue into two types – operating and non-operating. Operating revenue is any kind of revenue generated from a company’s core business. For example, the operating revenue of a restaurant is the money earned by selling food and drinks to customers.
Non-operating revenue is revenue that you earn from any secondary income source. In a restaurant business, the non-operating revenue may be the money you earn from selling gift cards, loyalty program cards, or restaurant merchandise like mugs and T-shirts.
Incorporating non-operating revenue is significant because it’s often nonrecurring and unpredictable. Sometimes, selling an asset, or a litigation victory can earn you money. This profit is unpredictable and nonrecurring and considered non-operating revenue.
However, you must know how to find revenue by all your income sources and types to understand where your profits come from and make appropriate business decisions.
Revenue vs. Income
Revenue and income are not the same, although they seem similar concepts. The revenue is all the money your products and services earn for you.
On the other hand, income is the money left in your hand after subtracting all your expenses regarding the business. Take the costs of making goods or services and other operational costs out of the revenue to get your income.
Example of Revenue and Income
Suppose you make handmade jewelry to sell on an online platform. To make a set of earrings, you spend $50 for the materials. After making the earrings, you sell them for $100. Here, $50 is your profit.
In this sense, $100 is your revenue, and your income is $50. The better you understand these distinctions, the more accurately you can grasp your finances.
Calculating your income is always vital, but the labor cost and time, which are not reflected in salaries, is also important consideration.
When you run a business single-handedly, you calculate your income by subtracting the material and operational costs only. Unless you pay yourself a salary, you can’t tally up your labor cost.
Why it’s Important to Calculate Revenue?
Why should you know how to calculate revenue? A company can understand how much money it has brought in the last month, quarter, or year by calculating its revenue. Based on the figures, a business can make decisions like salary hikes and product purchasing. The business owner can also have a clear idea of where to spend more and where to stop expenditure.
Revenue appears first on the income statement of any corporate establishment, and it’s the top-line income metric. Top-line growth, therefore, means revenue growth.
A company’s net income, which is the bottom line, contrasts with the revenue. Income means revenue minus expenses.
When a company contrasts these two lines, it understands how much it spent to earn the profits they have received. It is essentially one of the major accounting principles guiding your business activity.
You should obviously know how to find revenue, but revenue can’t stay in isolation. You need to consider your revenue along with other metrics to catch how healthy your business is. Thus, you can compare how much your business is growing relative to other companies and set your goals accordingly.
Earning a $1 million revenue in a quarter may make you happy that you are earning a satisfactory amount.
But, if you compare it to your net income, you may see you are taking only $20,000 home after all the expenses. What to do, then? Either cut off your expenses as much as possible or change the pricing of products to earn higher revenues.
Accrual accounting, fundraising from investors, and forecasting involve revenue, like profit margin, as its integral part. All these are necessary for considering the financial health of a company.
How to Increase Revenue?
After you calculate the revenue of your business and see it’s not impressive enough, the next question is, how to increase it? Increasing revenue has various ways. You can reduce operational costs by conducting layoffs, replacing supply chain arrangements, and streamlining manufacturing processes. Thus, each of your business units will cost less.
Otherwise, you can increase the cost of each unit of your product. Increasing the price of your product or service to an extent can bring you more money. However, this process involves risk. You have to ensure your target audience is willing to spend more for the same product or service.
When Should You Calculate Your Revenue?
Generally, businesses calculate their revenues after a quarter ends. As a crucial element of your balance sheet, you should consider all the essential metrics regarding your company’s financial health, including revenue, after every quarter.
Also, you can calculate your business’s revenue whenever you need to understand how much is your expenditure and how much you are gaining. Calculating revenue becomes necessary in the following situations:-
- Before increasing or decreasing your product or service’s price.
- Before increasing or decreasing the employees’ salary or laying them off.
- Before making some drastic steps for your company’s profit.
Accountants may calculate revenues regularly, which is considered a wise way to run a business. It’s helpful to analyze revenues regularly to see if it’s growing.
Summary
You should be thoroughly aware of how to calculate revenue, as it’s a mandatory part of your company’s overall balance sheet. Just remember to analyze it with other metrics rather than in isolation. Understanding your revenues and profits is an ongoing and ever-continuing process for your business.
