Did you know that two-thirds of the United States economy make a combined $14.2 trillion in annual revenue? Revenue remains an invaluable tool in calculating the net profit of any business. More importantly, it can also help investors and shareholders predict growth or decline within the company.
As such, knowing how to calculate revenue is a vital skill to have if you plan on running a business. But exactly how do you find out this figure? In this article, we’ll give you a run-down on the term and give you some easy tools to calculate it. Let’s get started!
What is Revenue?
Revenue refers to the amount of money that a business brings in for its goods or services. In other words, it refers to the amount of money that a customer pays a company. This number is one of the most important indications of how a business is doing. Why? Because it clearly shows how much money a company is making from whatever it’s selling.
Revenue can typically be found at the top of a company’s income statement. This gives it the nickname of ‘top line’. It’s important to note that revenue also includes any deductions that come in from returned goods, as well as discounts. A company can also get revenue from assets besides its goods and services.
For example, let’s say a computer manufacturer leases some of their equipment or rents some of their property out. This type of income would fall under ‘other revenue’. It’s also important to note that revenue comes from the time of sale, not the time of payment. This is to account for products that are sold on credit and paid for later.
What’s the Difference Between Gross Revenue and Net Profit?
Many newcomers often confuse their company’s gross revenue with their net profit. This is an important mistake to avoid as it can seriously affect your final income tax. As we mentioned before, gross revenue is often called the top line since it appears at the top of the income statement.
It refers to the total amount of sales with no consideration given to any expenditures. Net profit, on the other hand, subtracts the cost of the operating. This includes things manufacturing costs, shipping costs, and discounts, as well as things like storage. For example, let’s say a computer company sells a laptop for $1500.
The $1500 would fall under their gross revenue. Now let’s say that the manufacturing and shipping costs equal rough $300. The company’s net profit would be $1200. In your income statement, your net profit will be found at the bottom of the statement after all expenses have been subtracted. This gives it the nickname the ‘bottom line’.
Why is Revenue Important?
Revenue is the lifeblood of any business. Without a positive revenue, any company cannot stay economically viable for long. More importantly, it affects your standing with potential investors or lenders. Anyone is going to be reluctant to invest or loan cash to a company with poor revenue.
Without these resources, many companies will find it hard to invest in new projects or expand the scope of their business. Poor revenue can even affect the confidence of employees within the company. It’s going to be hard to keep or attract talent to your company when they’re worried that it might fold in a few years.
Ultimately, the true importance of revenue depends on the size of the company. For example, a small business might see a declining revenue as a warning sign that changes are needed.
However, declining revenue for larger corporations is much more serious. That’s because these entities are publicly traded and watched with a hawk’s eye. As such, poor gross revenue can seriously jeopardize the future of these businesses.
How to Calculate Revenue
The simple formula for calculating revenue will depend on the type of business you run. If you own a product-based business, then you can calculate revenue by multiplying the number of products sold by their average price. If you own a service-based business, then you can calculate revenue by multiplying the number of customers by the average price of your services.
These types of formulas will give you a good idea of your business’s sales revenue from month to month, or year to year. However, how do you calculate the future growth of your revenue? To do this you will need to know the recurring revenue your business experiences each month.
Recurring revenue differs from one-off sales in that they are predictable sources of income that’s expected to continue. Recurring revenue is most applicable to SaaS businesses, or services that rely on a subscription-based model. You can find it by adding the revenue brought in by new customers to the revenue brought in by existing customers.
Then add any upgrades or add-on fees that your service charges existing customers. After you have this figure subtract from it any lost revenue from customers that canceled their subscription, as well as downgraded accounts. Once you know your company’s recurring revenue, then you can use a revenue growth calculator to find out your prospects.
This type of calculation will take into account things like your churn rate or the rate at which you lose recurring customers. The resulting number will help you make important decisions about your business in the future.
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We hope this article helped you learn how to calculate revenue in a way that’s easy and understandable. Whether you’re a small business or a major corporation, calculating the amount of money you make in sales is a key part of determining your success.
Luckily, as long as you follow our advice, you should be able to find it quickly without any problems. Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep reading to find more topics that you’re sure to love.