Having a small business means having to make constant calculations. To have a thriving business, you need to know as much data as possible: your transactions, your incomes, your revenue, your ratios… like a calculate-all-you-want buffet of metrics.
This not only gives you a clear understanding of how your business is doing, but it helps you understand what you can improve and what paths you should take. In short, it helps you achieve success.
One of the most critical numbers in business management is gross revenue. Often called the top line, it is the starting point for all other metrics that a business must make.
Thankfully, gross revenue is not at all complicated.
What is Gross Revenue?
Gross revenue is simply the grand total a business makes from selling products, services, or both. Sometimes it’s also called gross sales. Unlike profit, no deductions are made to calculate it. It is merely a sum of all the sales of a business, be it large or small.
Both corporations and small businesses use gross revenue to analyze how they’re doing. Like any other metrics, it can be followed over time —say from one year to the next— to see if sales are increasing or decreasing.
Gross revenue vs. other metrics
To really understand what gross revenue is, it’s essential to recognize what it is not.
Gross revenue only evaluates a firm’s ability to drive sales. It is not a measure of how well a business can generate a profit.
It also differs from many other business metrics:
- It is not the gross profit. Gross profit is gross revenue minus returns and discounts minus the cost of goods sold.
- Operating profit is gross profit minus operating expenses (including amortization and depreciation).
You could say that businesses need to know their gross revenue to calculate any other metrics or ratios.
What About Investment Income? Is it Part of Gross Revenue?
A business may also receive income and capital appreciation from stocks, bonds, and interest-bearing deposit accounts. Although these are all types of earnings, they don’t qualify as gross revenue.
Only sales income is considered part of gross revenue.
Investment income is a separate entry on the income statement. This way, it’s easier to see how much money a business is bringing in from operations alone.
How do You Calculate Gross Revenue
To calculate it, the only thing you need to do is sum all incomes that were recorded from sales.
Let’s say an auto repair shop sells $570,000 worth of parts and labor, receives $8,000 back in returns, and spends $300,000 on COGS (cost of goods sold). What is gross revenue in this situation?
It is simply $570,000. There’s no calculation needed, other than to add up all the sales. The other numbers will be used for figuring different business ratios, however.
Gross revenue and accounting
Although we have pointed out how easy it is to calculate this metric, one crucial point is in order here. Exactly what sales should be included and which ones should not, can be affected by the type of accounting a business uses.
To fully understand what it is and how to calculate it, you must understand the two primary accounting methods: cash and accrual.
In cash basis accounting, a business records sales when money is received from the buyer. This differs from accrual accounting, which marks a sale when it’s made, which in some cases could be before payment is actually received.
So gross revenue could differ if a business uses cash accounting instead of accrual accounting, or vice versa.
The Importance of Gross Revenue
This metric is not as important or as significant to every type of business or industry.
And while you might need to know yours to calculate other metrics, make sure you focus on the right numbers.
- Because this metric does not consider the impact that product returns have on the number of sales generated by a business, it has more importance in service industries. These types of companies naturally have fewer returns.
- Businesses that sell mostly goods will experience a higher return volume. And this will lead to a lower gross profit. Thus, gross profit is a more accurate measure than gross revenue of how a business that sells goods is performing.
- Business analysts sometimes calculate a business’s value as a multiple of the gross revenue it has recently recorded. This is particularly true for new businesses or startups. In such situations, there may not be other reliable numbers to use.
Be careful about gross revenue: it is not the answer to everything
It is possible to rely too much on this metric when judging a business. For example, a business could have high gross revenue, but not be profitable.
- The management of a business could try to increase gross sales while ignoring other vital factors to increase the firm’s valuation.
- A business could also release new products to increase sales (and thus the gross revenue). But if the profit margin is small, the business may not earn enough money from the project. Or if the new products haven’t been fully tested, the business’s reputation could be harmed.
What is the Difference Between Gross Revenue and Net Revenue?
Now that you have a good understanding of what gross revenue is, let’s have a look at net revenue. Net revenue is simply gross revenue minus discounts and returns. Turning that into an equation we get:
Net revenue = Gross revenue – Returns – Discounts
A clothing retailer that offers frequent discounts and has regular returns will have a big difference between net and gross revenue.
A service company —such as a cleaning company or smartphone repair store— that doesn’t issue many discounts and doesn’t see a lot of returns will have similar numbers for gross and net revenue.
Net revenue example
Let’s go back to the example of the auto repair shop in the calculation of gross revenue. It had $570,000 in sales of parts and labor, $8,000 in returns of parts, and $300,000 of COGS. Its gross revenue was $570,000.
But for net revenue, we need to deduct the $8,000 worth of returns. Doing so gives us $562,000. Net revenue does not consider the cost of goods sold. So we ignore that figure.
In equation format, it looks like this:
Net revenue = $570,000 – $8,000 = $562,000
Start Improving Your Business’s Performance
Gross revenue is very important. Alongside other metrics, it will give you a clear picture of where your business is and what it needs to be to achieve its goals.
Make sure to add this metric to your existing repertoire so that you become a successful business owner.
Businesses that are looking for ways to increase their sales can find help from Camino Financial. We offer loans that can be used to open a new location, launch an advertising campaign, or expand your business.
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