All business owners have a keen interest in revenue. You want to make sure revenues are high. You worry if revenues are not meeting the targets. You consider what you can do to increase revenues. But have you ever stopped to think about the definition of revenue?
Without first understanding exactly what the word revenue means and what it refers to in your business, you can’t best position yourself and your business to maximize revenues. Every business needs to generate revenue in order to cover the costs you incur to run the business and end up with profit. Read on for details on what is revenue and why it’s so important.
What does Revenue Mean?
Exact Definition from English Cambridge Dictionary
According to the English Cambridge Dictionary, revenue is income that a government or company receives regularly.
While this is useful to know, it is not all that helpful in thinking about the definition of revenue in terms of your online business.
What Does Revenue Mean in Simple Terms?
In its simplest form the definition of revenue is the total amount of money that a company brings in over a set period of time. Revenue refers to the gross amount of income, before any expenses are deducted.
Sometimes referred to as sales or income, revenue is calculated by adding together all of the income that a company earned from sales in addition to any interest earned or equity accrued during the particular time period.
The top line on an income statement, revenue is what often indicates the health of a company. On the surface, high revenue could mean that a company is doing very well. But, if that is counterbalanced by high expenses, resulting in a less than stellar profit, the company might not actually be at its healthiest.
What does Revenue Mean in Economics?
Economics students learn to calculate revenue by multiplying the price of a particular good by the quantity that it is sold. This is written as the formula: R= p*q. Total revenue is calculated by adding together the revenue from each of the products that company sells.
Economists are particularly interested in marginal revenue. Marginal revenue refers to the additional revenue that a company earns from selling one more item. In order to maximize profits, a company will want to keep selling products as long as the revenue earned from each additional item sold is more than the cost of production. At the point when marginal revenue equals marginal cost, a company is maximizing its profits.
Use of Revenue in Finance and Accounting
Revenue is an important figure used in accounting, where it is calculated in a slightly different way than the everyday definition of revenue. In accounting, there is something called the “revenue recognition principle” which requires revenue to be acknowledged when the product or service has been delivered. Because in many cases products or services are delivered first and payment is only received later, this principle requires a company to report revenue before they actually have the money in their account. This is also known as deferred revenue.
At the same time that these sales are recorded as revenue in a company’s financial statements, the money owed (if it’s not received yet) is listed on the balance sheet as accounts receivable. When the balance due is paid, revenue (or income) stays the same, but accounts receivable goes down and cash goes up.
What Does Revenue Mean in a Business?
Revenue is critical to the success of a business as is calculating it accurately. Most revenue comes from sales - the proceeds of which are needed in order to cover the general operating expenses such as salaries, inventory, rent, and other daily and longer term expenses. Not all revenue comes directly from sales, however. Any income that a company receives falls into the definition of revenue and can be divided into two main categories - operating revenue and non-operating revenue.
Operating revenue is the income that comes from the core business and where the majority of a company’s income comes from. The exact types of operating revenue may be different depending on the industry, but main examples include:
- Sales Revenue - this is the income earned from the exchange of any goods or services for cash or cash equivalent (i.e. credit card or other payment method). These may be one-time sales or recurring revenues.
- Rent Revenue - anyone who owns a building or land and has tenants who pay rent earns rent revenue.
- Professional Services Revenue - for those who provide consulting services (i.e. legal, accounting, marketing, etc.) and receive payment in exchange for the services they provide, the income is classified as professional services revenue.
Non-operating revenue refers to any money a company receives that is not directly related to the core business. This type of revenue is usually somewhat unpredictable and doesn’t always happen on a regular basis. Examples of non-operating revenue include:
- Interest Revenue - interest revenue is the most common non-operating revenue as any company with a business bank account will earn interest on their balances which counts as this type of revenue. Any interest accrued on accounts receivable or other outstanding amounts due is also considered interest revenue.
- Revenue from Sale of an Asset - if the company has a piece of equipment or other asset that is no longer necessary and they sell it, the price paid to them is considered revenue. This is usually a one-off event and since it’s not part of the core business it is not considered the same as regular sales revenue.
How are Profit and Income Related to Revenue?
While the term “income” is often used interchangeably with “revenue,” it is very important to differentiate between income and profit (and therefore between revenue and profit). Profit is the total gained once the cost of expenses are deducted from the total revenue (or income).
Because of this differentiation, there are actually two types of revenue that are included on an income statement: gross revenue and net revenue. When discussing revenue, especially with potential investors or others interested in the success of your business, it’s crucial that you specify whether you are talking about gross or net revenue as the implications can be very different.
Gross revenue, which is often just called revenue, is the total income that a business earns from selling its products or services. For example, if you sell a product for $100, your gross revenue is $100. It does not account for any expenses you might have.
Most companies will calculate gross revenue at the end of every accounting reporting cycle, which in some cases will be every month (monthly gross revenue) and in others only at the end of the year (annual gross revenue).
Net revenue, also called net sales, is the remaining revenue once all expenses and other costs are deducted from the gross revenue. These costs include things like salaries, supply costs, discounts offered to customers, product returns, etc. For example, if you sell a product for $100, but you pay a worker $50 then your net revenue is 100-50 = $50.
Examples of Revenue in Different Industries and Sectors
While in general the definition of revenue is the income that a company receives in exchange for selling goods and services as well as any other income they may receive from other sources, revenue can actually mean different things in different sectors.
From a personal perspective, revenue is very different than when it comes to public finance. And business revenue is different from what revenue looks like in a nonprofit organization. Here are some examples:
Whether you are a business owner or not, you as an individual likely have some source - or multiple sources - of income. All of those types of income are what constitute your personal revenue. Personal finance revenue sources include:
- Hourly income
- Dividends and interest
- Earnings from rental income
Public entities like municipalities and other local and federal governments also receive revenue. Their revenue is usually in the following forms:
- Income tax paid by residents and citizens
- Corporate tax paid by businesses
- Sales tax paid by consumers
- Duties and tariffs
As a business owner, this is the category that is most relevant to you as it includes the revenues that a business earns. Such revenue categories include:
- Income from sales of goods
- Income from sales of services
Nonprofit organizations also have revenue, which comes from the following sources:
- Membership dues
- Fundraising campaigns
- Product or service sales
How can Pay.com Help Optimize your Revenue?
As an online business owner, using a payment services provider like Pay.com can help ensure that you are constantly optimizing your revenue. Your business success relies on you bringing customers to your site and giving them the best possible experience so that they will purchase from you and then keep coming back for more. Here are the key features that your customers will be looking for:
Emphasis here is on the word “easy.” Today’s customers want instant gratification and a quick process - they don’t want to spend more than a couple of minutes and a few clicks to make a purchase. That’s why you must offer a streamlined checkout experience that will meet and exceed even the pickiest customer’s expectations.
Cybercrime is all the rage and people are thinking twice about sharing their credit card details online. Customers want to be sure that the online sites where they shop offer the newest security functions. Pay.com can help ensure that payments made on your site are fraud-free.
Everyone has their favorite payment method. Some like the airline miles they earn from their Visa card. Others love the convenience of Apple Pay or Google Pay. New online and digital wallets are being introduced all the time. Bottom line - customers want to be able to pay using the payment method of their choice, not yours. It’s up to you to offer the largest variety of payment methods to keep your customers happy.
In addition to giving customers what they want, Pay.com also gives you a personalized dashboard where you can keep track of all of your sales and revenue. This dashboard will give you a plethora of insights that you can use to analyze your marketing activity and see where improvements can be made in order to increase sales and revenue and keep your business growing.