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Any business owner will agree that few things are more important than revenue. Business revenue generated is, after all, what determines how much money your business is earning and the more you earn the more successful you are likely to be.
While everyone agrees on the importance of revenue, it is not actually such a straightforward concept. There are a few different types of revenues:
- total revenue,
- sales revenue,
- marginal revenue,
just to name a few. In this article, we will focus on sales revenue, the definition of which is the money received specifically for goods sold (or services).
Read on to explore and understand how to calculate sales revenue and why it is so important for the health of your business.
Among the important terminology & key takeaways we will use in this article are:
- Income statements - a report of a company’s revenue, expenses and profit (or loss) during a defined period of time.
- Operating income - a company’s earnings before paying any interest or taxes.
- Non-operating income - a company’s gross profit (or loss) that comes from activities that are unrelated to the core business.
- Goods sold - total number of products or services that a company sold during a specific time period.
- Sales/Goods price sold - the total revenue (price received) for the products or services sold during a specific time period.
- Gross Sales - the total income from sales of products or services.
- Net Sales - total income minus expenses.
- Revenue formulas - the mathematical functions used to calculate different types of revenue.
Sales Revenue Definition
Many people use the terms revenue and sales revenue interchangeably, but there is actually an important difference. Where total revenue is all income that a company earns, sales revenue refers only to income that comes directly from the sales of goods or services.
Usually, a company has a particular core operating activity - a type of product they sell or service they offer. It is the income from those activities that make up sales revenue, even though they still might earn money from other peripheral activities such as the sale of a piece of real estate or equipment that they don’t need anymore. It’s easiest to think about it this way - all income from sales is considered revenue, but not all revenue is sales revenue.
How to Determine Sales Revenue?
One of the most important things to keep in mind when it’s time to do the sales revenue calculation is to remember that you are only looking at revenue that comes from the company’s core operating activity.
Following are the three simple steps you need to take in order to calculate sales revenue:
- Determine price - it probably goes without saying that you first need to implement your pricing strategy and assign prices to your products before you sell them. Knowing how much each product is selling for is crucial to be able to calculate your sales revenue.
- Identify units sold - whether you are a sole proprietor or running a conglomerate, you must have a way to track exactly how much of your inventory has been sold.
- Multiply price by units - simply take the number of products you sold and multiply that by the price. This will give you the total sales revenue generated.
If your business involves selling more than one product with different prices, then you do the calculation for each product separately and then add the totals together for the final number.
Difference between Total Revenue vs. Sales Revenue
The easiest way to illustrate the difference between total revenue and sales revenue is with an example. Let’s say that in one particular reporting period, Company X sells $100 worth of coffee mugs. During that same time period, they also earn $50 on interest in their bank account.
To calculate total revenue, we add up the income they received from selling mugs and the $50 in interest. Company X’s total revenue during this time period was $150. Their sales revenue, however, is just $100, the money earned from their main operating activities. The $50 is non-operating income and does not count towards sales revenue.
Net Revenue vs. Gross Revenue Data
It is also important to differentiate between net and gross revenue. Gross revenue refers to the total income received, without taking into account any expenses. If the coffee mug sold for $100, then gross revenue is $100.
The formula for net income (another term for net revenue) simply involves deducting the cost of goods sold from the gross revenue. If it cost $25 to produce and ship the coffee mug, then the net revenue from a $100 sale would be 100 - 75 = $25.
How to Calculate Sales Revenue?
It’s important to not get confused between total revenue and sales revenue. If you were to calculate total revenue, you would include all sources of income, even those that are not directly in response to the sale of a good or service. For that reason, total revenue is generally higher than sales revenue.
- Sales Revenue Formula
Sales revenue is calculated using the sales revenue formula:
Sales Revenue = Number of units sold * Price per unit
Following is a review of the sales revenue formula in practice and how you can use it to figure out your revenue numbers:
- Find Gross Sales Revenue
Gross sales revenue is the income received from sales of all goods and services during a particular time period (the price per unit times the number of units sold).
Gross Sales Revenue = Price per unit * units sold
- Calculate Expenses (Cost of Goods Sold)
Costs of Good Sold is another line on the income statement and reflects how much it cost to produce and maintain the products that were sold. This line item can include anything from employee salaries to materials to storage or shipping costs. In order to determine profit, you subtract the cost of goods sold from sales revenue
- Find Net Sales Revenue
To determine net sales revenue, you take the gross sales and subtract any returns or other allowances. When you calculate sales revenue, remember that the number that you get is the gross revenue. If you would like to know the net sales revenue, make sure you subtract expenses and the cost of goods sold. The net sales revenue formula is:
Net Sales Revenue = Gross Sales Revenue - Cost of Goods Sold
- Calculate Net Profits
The net sales revenue can also be used to help calculate overall net profit. There are usually additional expenses that a company will have in addition to the cost of goods sold. In order to determine the overall net profit, you would need to subtract those other expenses from the net sales revenue to get the net profit.
Net Profit = Net Sales Revenue - Other Expenses
- Formulate Income Statements
The income statement is a key financial document that every business has to prepare on a regular basis as part of their financial statements and reporting. Every company must produce a number of financial statements, including income statements, at regularly defined times.
The amounts described above should all be shown on the income statements, which would allow anyone who is interested to determine the revenue generated by a company and understand how that company is doing financially.
In the example below, you can see Amazon.com’s income statement from back in 2017. The top section is highlighted to show how total net sales revenue forms the basis of the income statement with the rest of the information flowing from there.
How to calculate sales revenue on income statement
Sales revenue is generally the first line on the income statement and serves as the basis for deriving much of the rest of the information in the statement. It is listed separately from total revenue and can even be broken down into different revenue streams if necessary. All following expenses below sales revenue on the income statements are often displayed as a percentage of sales revenue. It is really one of the most important measures of a company’s success - for this reason and because of its prominent place on the income statement, sales revenue is known as a business’ “top line.”
Real Examples of Revenue Calculation
When calculating revenue, you must take into account when the delivery of the product took place and when payment was received. Depending on the accounting method that you use, you may recognize revenue on your income (financial) statement during the month (or other time period) that the product was delivered and not when the income was received.
For example, let’s say that an online seller of flip flops sold 50 pairs of flip flops in the month of May for $10 each and was paid $500. But only 40 of those pairs of flip flops were actually delivered to customers in May. On the income statement, total sales revenue generated would equal $10 * 40 + $400, with the remaining $100 being recorded as deferred revenue.
In another example, a retailer that sold 250 notebooks for $20 each would have $5000 (250 * 20) in sales revenue. If it cost the company $10 for every notebook sold, then the cost of goods sold would be $2500 (250 * 10) and their net profit would be $2500 (5000 - 2500).
Expert Tip:
You may also be interested in knowing your marginal revenue, which is the amount you can expect to earn by selling one additional product. Marginal revenue is calculated with this formula:
Marginal Revenue = Change in Revenue/Quantity Sold
It can be useful to know this information if you are considering changing your pricing strategy and want to know what the impact will be. If you feel that your sales revenue is lower than you would like it to be and you want to see what price you would need to charge in order to sell a higher amount of goods, you can use the marginal revenue formula.
How to Use Sales Revenue Formula Results
You can use the sales revenue formula to help guide your strategy going forward. Compare your sales revenue to your goals for the month or quarter or year. - Did you:
- Meet them?
- Exceed them?
- Or fall short?
Consider whether there are incentives you can offer your sales team or your customers to encourage additional purchases.
You can also use the sales revenue formula to forecast growth. Predict out how much revenue you expect to earn given the market conditions and historical trends. Then you can build on this information and determine whether you need to hire additional employees or change your marketing strategy or invest in new product lines or any other change in strategy to meet your goals.
Why Is Sales Revenue Important and What Can it Tell You about Your Business?
Sales revenue is not only the foundation upon which the rest of your business’ income statement is built, but it also is key to calculating a lot of the KPIs you may want to track in order to monitor the health of your business and inform your growth strategy. So much of the information you need in order to make business decisions is hidden within your sales revenue number.
Here are just some of the things that sales revenue can help you determine about your business:
Profitability
Even more than gross profit, the sales revenue number tells you at a glance how profitable your core business activities are.
Investment Decisions
Looking at the sales revenue numbers for each product or category of products will show you which areas are doing well and which are struggling. You can then adjust your strategy and put more marketing effort into the products that are struggling or decide to scrap them completely and focus on the higher-sellers.
Loan and Contract Eligibility
There are often loan applications and government contracts that are specifically available to companies that fall under a certain revenue threshold. Knowing where you stand can help you identify whether or not you are eligible for these potential growth opportunities.
Update Pricing
It can be a challenge to figure out how to find the selling price that works best. You can use sales revenue to help you figure out if you are earning enough vis a vis your expenses or if you need to consider adjusting your prices.
How to Optimize Your Revenue?
You are probably always thinking about ways that you can optimize your revenue. Making sure you aren’t losing customers while also doing your best to attract new ones. If you see your sales revenue numbers dropping, there could be any number of reasons, some of which are easy to fix.
Increase Revenue by Improving your Pricing Strategy
Creating a pricing strategy is not a “one and done” process, but rather something that should be continuously revisited. If you are not seeing the sales revenue numbers that you expect, perhaps your pricing is not in line with the market. Maybe it is time to actually lower your prices in order to drum up additional demand. On the other hand, if you are seeing lots of sales, you could consider increasing prices just a little to see whether you can eke out any additional profit (of course, you need to be careful with this because if you go too high you will see a drop in sales).
Create a Strong Long-Term Revenue Growth Strategy
Owning and running a business is a long-term game. You should always be thinking about the future and what you can be doing to grow your business to achieve your goals in the long run. It can take time to build up a reputation and grow a strong customer base, so do not expect to see immediate results. You can and should have a plan in place as to how you will grow your revenue over time - this can include the introduction of new products, expansion to new markets, and more.
You might also read: How to Create a Marketing Campaign
Of course, there could also be a number of other reasons why you are not seeing the revenue numbers you desire and there are even some quick fixes you could do to optimize your revenue. For example, maybe your customers are frustrated because they sense a lack of communication. Is it easy for them to get through to you if they have questions or if there is a problem with the product? Make sure you are super responsive and watch your customers’ loyalty grow.
In addition, if you have a complicated check-out process, you are probably losing customers right up to the last minute when they would otherwise be about to pay. Pay.com can help you optimize your revenue by setting you up with an easy-to-use and seamless checkout page and payment process. The easier it is for customers to buy from you, the more they will and the more your revenue will grow.
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- Revenue Definition: Explanation, Meaning and Examples
- What is Revenue in Business and How to Analyze It
- What is Marginal Revenue and its Formula | How to Calculate It?
- How to Write a Business Plan for your Small Online Business
- How to Accept Online Payments in 2022
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