What is revenue?
When you run a business, the biggest aim is to make money – without it, there is no business. Revenue is the total income your company makes from the sale of goods and services. It is also known as gross sales and is often referred to as the top line because it’s the first line on your company’s income statement.
Calculating revenue is important because it informs your business decisions and allows you to monitor revenue growth. Work out your revenue using the following revenue formula:
Average price of product x Number of sales = 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. A company records its 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 the ATO.
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 any discounts, allowances, returns and other deductions.
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, the GST you need to pay and what your cash flow is like.
There are two sub-divisions in accounting – operating revenue and non-operating revenue.
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.
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. Accrued 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.
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 i.e. 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 the 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.