Revenue is generated by a business’s core operations. It consists of the money a business earns from sales of its goods and services, minus any returns, discounts or allowances.
For example, a cleaning business earns revenue when it provides cleaning services to a customer, perhaps priced by the visit or hour. Some businesses may have revenue from both products and services — for instance, a manufacturer of factory tools might collect product revenue from selling equipment and service revenue from maintaining that equipment.
Why Is Revenue Important for Your Business?
Revenue is a measure of the company’s success in generating sales. It’s also a key measure of business growth, since companies generally grow by increasing revenue.
Revenue is influenced by the price of products or a service offering as well as the number of units sold. Discounts can increase sales but result in lower revenue, depending on how many units are sold at the lower price. On the other hand, seasonal surges in demand or successful marketing initiatives can increase the number of units sold without requiring price reductions, resulting in higher revenue. In fact, many companies determine the success of marketing efforts or promotions by looking at its impact on revenue.
What Is Income?
Income and revenue, while related, are different. While revenue accounts for cash coming into the company in cash account, businesses calculate operating income by subtracting expenses from that revenue. Although some treat revenue and income as synonyms, when finance professionals talk about “income,” they usually mean gross revenue or net income — revenue minus expenses — and not the raw revenue number.
Types of Income
In addition to any non-operating income, companies typically calculate and report several different types of income:
- Gross income, or gross profit, is a measure of the profitability of a company’s products or services. It is calculated by subtracting the cost of goods sold (COGS) from revenue. COGS includes only the costs directly related to the production of goods or services.
- Operating income is calculated by subtracting operating expenses from gross income. Operating expenses are all of the indirect costs required to operate a business. They include COGS — the direct costs associated with a company’s core business — and other costs such as depreciation and amortization.
- Net income is the profit after subtracting all costs, including taxes and non-operating expenses. Because of this, net income is typically lower than gross or operating income.
To calculate revenue, total all sales and subtract returns, discounts and allowances. The formula for revenue is:
The revenue formula can be stated as follows:
Net Revenue (Net Sales) = Unit Price x Units Sold — (Discounts + Returns + Allowances)
Sales tax is not counted as revenue. Instead, sales tax becomes a current liability on the balance sheet until the taxes are remitted to the government.
To illustrate how revenue is calculated, let’s use a simple example of an ecommerce site that sells a single product: a cellphone stand. During the current accounting period, the web store sold 100 stands at the standard price of $4.50, and 120 stands at a 20% discount ($3.60):
100 units at $4.50 = $450
120 units at $3.60 = $432
During the same period, the store had two returns at the original price:
2 units at $4.50 = $9
The store calculates revenue as:
$450 + $432 — $9 = $873