What is Revenue?

Revenue is the total amount of income generated by a business from the sale of goods and services over a period of time. In accounting, it is often referred to as the top line or sales before expenses are subtracted as it appears at the top of the company financial statement.

Revenue definition and importance

One of the key aims when you run a business is to make money. Revenue is the total income your company makes from the sale of goods and services. It is also known as gross sales and often referred to as the top line because it’s the first line on your company’s income statement.

Calculating it is important because it informs your business decisions and allows you to monitor revenue growth. You can work it out using the following revenue formula:

Average price of product x Number of sales = Revenue

Revenue vs. income/profit

Revenue is the total amount of money your business earns from all its sources. This is further divided into operating revenue which refers to sales from a company’s core business activities and non-operating revenue which covers income from secondary activities. For example, the sale of an asset.

Income or profit is the total figure a business earns after all expenses are deducted. These operating expenses will include production costs and raw materials as well as rent, tax, commissions and sub-contractors.

Who needs to understand revenue?

Every business owner needs to understand sales revenue because it helps drive growth. Keeping track of it will provide insight into how well a business is doing and whether sales are rising or falling.

It is one of the most important metrics for any small business and an integral part of understanding business finance. If you understand revenue you make adjustments where necessary to improve cash flow, net income and increase revenue growth. It is also important to have a good handle on it when applying for finance as investors will want to know this figure.

Types of revenue

Revenue is divided into two types. The first one which covers a business’s main activities. For example, a restaurant selling food and drink to paying customers. The other covers secondary activities such as that same restaurant subletting part of its kitchen to another chef or selling a piece of equipment it no longer needs.

They are classed as follows:

• Operating revenue is money you generate from your primary business activities. This can be split into revenue streams so you know exactly which products or services generate the most cash.

• Non-operating revenue is cash generated from other sources like share dividends, profits from investments or from the sale of assets.

Reporting revenue

A company wants to maximise its income and minimise expenses, particularly in the beginning when building sales, or acquiring customers and costs are higher. Companies will record their financial activity, including sales and other income at the end of a reporting cycle. This might be monthly, quarterly or annually.

Keeping track is essential to monitor revenue growth and ensure pricing is correct but also to calculate what taxes you need to pay HMRC.

The difference between gross revenue and net revenue

Gross revenue, sometimes referred to as gross income, is the total amount of money your company makes from goods or services it sells and other sources. Your net revenue is the amount of money your business makes minus its costs e.g. cost of manufacture, rental, raw materials, salaries etc.

Accounting for revenue

When it comes to accounting, accurate financial tracking is vital so you can see what profit you’re making, where savings need to be made, if the pricing is correct, what tax you may be liable for and what your cash flow is like.

For accounting purposes, it is recorded as operating and non-operating revenue.

These can be further split into accrued and deferred revenue which is when a sale occurs at a different time to the transfer of funds. Accrual accounting is used to record income when a customer has bought something but pays later. Deferred revenue is used in the opposite situation where the customer has prepaid for something to be received at a later date.

Any money from sales or other income is recorded at the top of your income statement and to calculate gross profit, sometimes referred to as net revenue, you subtract the cost of goods sold.

Frequently asked questions

Are revenue and sales the same?

The terms are used interchangeably but technically they are different. Revenue refers to all income your business receives; sales refers specifically to the sales of goods and services made by your company.

Are revenue and turnover the same?

Again they’re used interchangeably but mean different things. Turnover can mean income or gross revenue ie the total amount of income from sales and other sources a business receives. It also refers to how many times a company makes or burns through assets and affects the efficiency of a company while revenue affects profitability.

Can revenue be negative?

It can turn negative if product returns and rebates exceed its income from sales and other sources. It can indicate a poor financial position or it can result from macroeconomic disruption beyond a company’s control.

Revenue calculation and formula

Revenue formula is very straightforward. It is simply the price of the goods or services multiplied by the number sold.

For product-based companies the formula is:
Revenue = number of units sold x average unit price

For service-based businesses the formula is:
Revenue = number of customers x average price of services

Example of revenue in business

A technology retailer sells laptops and mobile phones - this is its core business activity. It also sells insurance and aftercare services and takes pre-orders for products that have not yet been released. In addition, it has a subscription service for its monthly gaming magazine and charges professional fees for its computer engineers to repair and rebuild electronic goods. These are all different revenue streams which add up to form the company’s top line revenue.

For argument’s sake this figure was £1.35 million in the last 12 months.

But they have operating expenses (rent on their premises, staff costs, utilities, packaging and transport, marketing and advertising etc) which total £1 million.

Income/profit = revenue - operating expenses

Income is therefore calculated as £1.35 million - £1 million = £350,000 income/profit.