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For your small business to achieve success, it needs to generate revenue, also known as sales or the “top line.” Without revenue, you would not be able to maintain your daily operations. For example, paying your employees and bills, stocking up on inventory and supplies, and keeping your website up and running would be difficult. You might have questions about revenue, including how it works and how to calculate it. Or, you may wonder if revenue is the same as profit or if robust revenues mean your company has a positive cash flow.
If so, you are not alone. Many entrepreneurs understand how essential revenues are, but they need a quick primer on the basics. This Balboa Capital blog post answers the question, “what is revenue?” and features information we think you will find helpful.
Revenue is one of the most critical financial metrics to track in order to assess your business’s health and understand how well it is performing in a specific time frame. Your income statement includes two types of revenues: operating and non-operating.
Operating revenue, commonly known as sales, refers to the income generated from the business’s core operations or activities. The type of operations or activities that drive sales will differ based on the kind of company. For example, a restaurant owner would record operating income from food and beverage sales. Service-oriented businesses are different. In the case of an accounting firm, the operating revenue is generated by providing tax preparation and filing and other accounting services, such as financial consulting.
Non-operating revenue is earned outside of a business’s core operations or activities; it is infrequent and generated inconsistently. Common examples include interest from business bank accounts and accounts receivable, gains from equipment or asset sales, and proceeds from lawsuits.
How to calculate revenue.
You can calculate your business’s revenue anytime to see your sales performance. However, it is commonly agreed among accountants and financial experts that it should be calculated when a reporting period ends. So, it is a good idea to run a report on a monthly, quarterly, and annual basis. It is important to remember that there are several types of revenue that you can calculate and that each one is different. The most commonly used calculation is the total revenue formula, an example of which is provided below.
Total revenue formula.
The total revenue formula involves multiplying the number of units sold by the unit’s price. Let us use a toy store as an example. The store sold 670 toys in one quarter, and the price for each toy was $25. So, the store’s revenue for the quarter is $16,750. When calculating, make sure you don’t include the cost of goods sold (COGS), which, in this example, would be the costs associated with manufacturing and delivering the toys.
670 (units sold) x $25 (price per unit) = $16,750 (total)
The formula is similar for service-based businesses. For example, a digital content agency acquired seven clients in one month, and each contract was $1,900. After running the formula, the digital content agency’s total revenue for the month was $13,300.
7 (number of clients) x $1,900 (contract amount) = $13,300 (total)
Calculating total revenue can become tricky for businesses that offer ancillary services. For example, suppose a landscaping business brings in money from lawn and garden consulting and landscape planning services. In that case, its total revenue is the money earned from its core operations (mowing lawns, trimming trees and shrubs, etc.) plus the consulting services. Adding up all sales sources for a particular time frame will produce the total. So, if the landscaping business made $4,500 for general landscape work and $1,200 for lawn and garden consulting in one month, its total revenue was $5,700.
Interpreting the results.
Your total revenue calculation results provide you with important information relating to sales, profits, and product or service pricing. It is a good idea to compare your total year after year to evaluate your business’s annual performance and identify any areas that need improvement. If your company has high total revenue, also known as high “top-line growth,” solid sales are seen.
However, if your revenues are slumping, you need to know why. An unexpected downturn in the economy, increased competition, and seasonality can affect sales. In addition, shoppers’ tastes are known to change, and, as a result, the demand for certain products and services can decline.
Include revenue in your income statement.
Your revenue report needs to be included in your business’s income statement, which, as you know, is an important financial document that shows a complete breakdown of your income and expenses. Also included in your income statement are COGS, net income, depreciation, and earnings before interest, depreciation, taxes, and amortization (EBITDA), among others. Your income statement gives you a bird’s-eye view of your entire operational results. As a result, it can help you make informed decisions about all facets of your company, particularly when setting prices or considering a potential investment or expansion plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.