Understanding what annual revenue is and how to calculate it is an essential skill for every merchant.
- Annual revenue refers to the total income earned from the sale of products or services over a 12-month period.
- It is calculated by multiplying the number of goods or services sold by their sale price.
What is annual revenue?
Annual revenue is all of your business’s income from the sale of products or services, assets, and capital over a 12-month period. It’s common for business owners to confuse annual business revenue with profits, but they are not the same. Profit refers to the surplus amount of money left over after deducting the cost of inputs, expenses, and taxes over a given period. Annual revenue refers to gross revenue generated over a year period.
For example, suppose an eCommerce business called FashionShop sells t-shirts as their primary business. Last year the business sold $100,000 worth of t-shirts. In this case, annual business revenue would equal $100,000. This figure does not factor in fabric, marketing, and other costs to produce and sell the items.
Why is annual revenue important?
Annual revenue is a crucial metric for every business. It is essentially a performance barometer. This is why most merchants spend a lot of time analyzing their business’s progress in this area. Ultimately, annual revenue is important because it is used to calculate how much tax your business will pay. It is also an excellent marker to track the progress and health of your business and is one of the key deciding factors for banks during the loan approval process.
What are the different types of revenues?
All merchants need business revenue to continue operating; this much is obvious. However, what’s much less known, especially among small business owners, is that revenues are classified into two categories - operating and non-operating.
Operating revenue is the total amount of money a business brings in from its primary business operations (i.e., sales of products or services). For example, a retail store will usually produce operating revenue from the sale of goods. If a store sells TVs and makes $1 million from sales, its operating revenue is $1 million.
Non operating revenue
Non operating revenue is any business revenue earned from non-primary business operations, including:
- Asset and capital sales: Revenue from the sale of any equipment, property, and other types of assets.
- Dividends: Any dividends earned from investments in shares are considered non operating revenue.
- Interest: If a business loans money with interest payments to another entity, the money made from these agreements is placed under non operating revenue.
- Rent: Any business revenues gained from renting out a property or equipment to another entity must be included under non operating revenue.
- Contra: Includes revenue deductions from returned goods, sales discounts, and sales allowances. (This type of revenue has a negative value).
Is annual revenue the same as annual sales?
The terms annual revenues and annual sales often get used interchangeably in the business world. However, there are critical differences between the two. Annual revenues are all of a business’s income generated over 12 months, including revenues from selling goods or services and asset and capital sales (e.g., sale of equipment or property). On the other hand, annual sales refer to a company’s income from selling goods or services to its customers.
Find annual sales revenue
If you use an accountant to handle your bookkeeping, you may not know where to find annual sales revenue on your business’s financial statements. The good news is that it’s super easy to find. When you receive your annual report, head to the income statement. There you will find the most recent annual sales figure. Typically, you’ll also often be able to view annual sales from the previous year, enabling you to compare your business’s performance and see if your sales are increasing or decreasing.
How to find the annual revenue for a company?
Annual business revenue usually appears at the top of the income statement which is one of the three key financial statements (along with the balance sheet and cash flow statement) that provide a snapshot of a business' health. An income statement includes the following information.
- Company yearly revenues/ income: Income from the sale of products or services, assets, and capital over a 12-month period.
- Annual sales revenue: Income from sales of goods or services to customers over a 12 month period.. Gross sales are all sales without any deductions. Net sales are gross sales minus sales allowances, discounts, and returns.
- Gross profit: Gross profit is the difference between a company’s sales and its cost of goods sold (COGS).
- Expenses: Expenses are costs sustained while operating your business. These costs can either be fixed or variable.
- Taxes and obligations: The amount of money you are required to pay to the government based on your income.
- Net business income/loss: The amount of money your business has left (profit) after all expenses have been paid.
Formula for calculating annual revenue
Calculating your annual business revenue may seem intimidating, but it’s actually quite simple. However, before we jump into the formula, it’s important to note that the accounting method you use impacts the business revenue amount you’ll see on your income statement.
If you work with the accrual accounting method, your annual business revenue will include sales of goods or services you’ve already delivered to your customer but have not yet received payment for. In contrast, if you use the cash basis accounting method, your annual revenues only include sales for which you have been paid.
You need to know two figures to calculate your annual revenue. These include the prices of the items sold and the quantity of each item sold. Once you have these, all you need to do is plug them into the following formula:
Annual revenue = quantity of goods (or services) sold X sales price
Examples & case studies
Let’s take a look at a few examples so you can get a better idea of what’s involved when calculating your annual revenues. We’ll start off with a straightforward example and then progress to slightly more difficult examples.
Example 1 [Yummy Pies]
Suppose there’s a pie shop called Yummy Pies that sells three types of pies. Steak pies cost $5, chicken pies cost $4, and vegetarian pies cost $3.50. The business sold 5000 steak pies, 6000 chicken pies, and 4000 vegetarian pies in the previous year and did not produce any non operating revenue.
To calculate the annual revenue of this business, we must first calculate the revenue of each product sold:
- Steak pies: $5 X 5000 = $ 25,000
- Chicken pies: $4 X 6000 = $ 24,000
- Vegetarian pies: $3.50 X 4000 = $ 14,000
Total annual revenue is equal to the sum of steak, chicken, and vegetable pies -
$ 25,000 + $ 24,000 + $ 14,000 = $63,000
Example 2 [CoffeBeans]
For this last example, let’s use the CoffeeBean business. Let’s pretend that the owners of CoffeBean also own the building they operate from. The building has an upstairs office that they rent out to another business for $2000 per month.
In this case, to find out the total annual revenue, we’ll need to calculate the business’s non operating revenue it receives from renting out the office upstairs.
This can be done by multiplying the monthly rent payments by 12 months:
$2000 X 12 = $24,000
Therefore, the total annual revenue of this business is the sum of the non operating revenue and operating revenue from the sale of coffee:
$24,000 + $132,000 = $156,000
How to use annual revenue results?
Annual business revenue is an important figure to know and can be utilized for a variety of reasons. It can be used as a marker to track the progress and health of your business - comparing year on year to see if revenues are increasing, staying the same, or declining. Additionally, if your business is seeking financing, annual revenue is often one of the key deciding factors for loan approval. This is especially true if your business’s credit is weak.
How is annual revenue different from net (business) income?
Annual revenue and net business income are different but they can both be found on the income statement. At the top of an income statement, you’ll find annual revenue, which includes all of a business’s income from the sale of products or services and any assets or capital over a 12-month period. Net business income appears near the bottom of the income statement. It refers to a business’s profit and represents how much money is left over after all expenses such as payroll, raw materials, and taxes have been subtracted from revenue.
Should you consider annual recurring revenue into calculations?
Annual recurring business revenue indicates the amount of recurring revenue a business earns over a year. ARR is a crucial business metric for software, SaaS, and other types of subscription businesses and should definitely be included in calculations. It is calculated by multiplying monthly recurring revenue by 12 (months).
What is a good annual revenue for a small business?
There is no specific number that is considered good when it comes to small business revenues because revenue varies considerably depending on business type, number of employees, industry, and location.
For example, according to the US Small Business Administration (SBA), businesses with no employees make on average around $46,000 in annual revenue.
Companies with 1-4 employees make much more with $387,000 in yearly revenue, and those with 5-9 employees average $1,080,000. At the end of the day, what’s most important is that your business revenues are continually growing, along with your profits.
How to report revenue on applications for financing
When applying for financing, you should always closely follow the directions of the particular financial institution you're applying to. However, in general terms, banks require you to include your gross annual revenue from the previous year. You should leave out any business revenue you can't verify or that's not directly related to your operations. It's also important to understand that most banks are not interested in sales or business revenue projections because they are unreliable and tend to be inflated by business owners.