What Is Gross Revenue and How to Calculate It
Gross revenue is important because is a good way of knowing how well your business is doing.
In addition, this calculation also helps you understand where you can improve and what paths you should take.
This article answers the question of what is gross revenue and its importance to a successful business. Likewise, it explains the formula to obtain it, how to clearly differentiate it from other types of income, and identifies it in the annual business revenue.
|Table of Contents|
|1. What does gross revenue mean?|
|2. The importance of gross revenue|
|3. What is the gross revenue formula?|
|4. Evaluate gross revenue in businesses|
|5. Gross revenue vs. Net revenue|
|6. Gross revenue vs. Other metrics|
What Does Gross Revenue Mean?
Gross revenue is a business’s total from selling products, services, or both. Sometimes it’s also called gross sales.
In other words, it’s the amount of money a company brings in from its customers through selling its products and services.
Gross revenue for businesses allows analyzing how they’re doing. Like any other metric, you can follow it over time —from one year to the next— to see if sales are increasing or decreasing.
What is the gross annual revenue?
Gross annual revenue is the total revenue that a company generates in one year. This figure includes all income from sales, investments, and other sources.
Gross annual revenue is an important metric for assessing a company’s financial health. Investors and lenders often use this metric when considering whether to invest in or lend money to a business.Learn strategies to increase company profits!
The Importance of Gross Revenue
Gross revenue reporting is an important metric depending on your business type and the industry.
Businesses that sell mostly goods will experience a higher return volume. And this will lead to a lower gross profit. Thus, gross profit is more accurate than gross revenue of how a business that sells goods performs.
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 companies or startups. In such situations, there may not be other reliable numbers to use.
Special considerations to think about
It is possible to rely too much on this metric when judging a business. For example, a company 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 company may not earn enough money from the project. Or if you don’t test the new products fully, the company’s reputation could suffer.
What Is The Gross Revenue Formula?
To make a gross revenue calculation, you must add all recorded sales revenue.
Also, you must consider the accounting your company uses and thus be able to identify which sales you should include and which should not.
Total Gross Revenue = Total sales revenue – Cost of Goods Sold
How to calculate gross revenue? An example
Suppose an auto repair shop sells $570,000 worth of parts and labor and spends $300,000 on COGS (cost of goods sold) in a year. What is gross revenue in this situation?
The annual gross revenue is $570,000. There’s no calculation needed other than to add up all the sales. However, the other numbers you will use to calculate different trade ratios.
Evaluate Gross Revenue in Businesses
There are a few key things to keep in mind when analyzing gross revenue
- Make sure you have a clear understanding of what your actual gross revenue is. This seems like a simple concept, but it’s important to be clear on the definition before moving forward.
- Be sure to take into account all sources of gross revenue. This includes product sales, services, interest and investments, and more.
- Gross revenue can be a good indicator of business health, but it’s important to remember that it’s not the only metric you should be looking at. Ensure you also consider other factors, such as net income and cash flow.
- Compare gross revenue to other measures, such as net income and operating cash flow. This will give you a better idea of how efficiently a company generates revenue and turns it into profit.
- Gross revenue can fluctuate from month to month or year, so it’s important to look at trends over time rather than focusing on one particular period.
Gross Revenue vs. Net Revenue
Gross revenue is the total amount of money a company takes from sales of its products or services before any expenses are deducted. On the other hand, net revenue is the total amount of money a company has left after all costs are deducted from gross revenue.
Turning that into an equation, we get
Net revenue = Gross revenue – Returns – Discounts
A clothing retailer offering frequent discounts and regular returns will significantly differ 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 many returns will have similar gross and net revenue numbers.
What is the difference between gross and net revenue?
The main difference between gross and net revenue is that gross revenue includes all income, while net revenue only includes the income after deducted expenses.
Gross revenue is important because it shows how much total money a company brings. However, net revenue is more important because it shows how much profit a company is making.
Net revenue example
Let’s go back to the example of the auto repair shop. It had $570,000 in parts and labor sales, $8,000 in parts returns, and $300,000 in 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 = $562,000Discover ways to increase the profits of your business
Gross Revenue vs. Other Metrics
To understand what is gross revenue, it is essential to know how to differentiate it.
Gross revenue only evaluates a firm’s ability to drive sales. It does not measure how well a business can generate a profit.
Gross revenue vs. income
Gross income is the total amount of money a business brings in during a specific period, while gross revenue is what is left of that gross income after you pay all expenses.
In other words, gross revenue is the top line figure, while income is the bottom line figure. Expenses include salaries, rent, materials, shipping costs, etc.
Gross revenue vs. gross profit
Gross profit and gross revenue are two important measures of a company’s profitability. Gross revenue is the total amount of money a company brings in from sales of its products or services.
This number includes all revenues, including sales of any raw materials, labor, shipping, and other associated expenses.
The gross profit is the total revenue minus the cost of goods sold. This number represents a company’s pure profit from selling its products or services.
It’s important to note that gross profit does not include many other important expenses such as operating costs, advertising, and marketing expenses.
Therefore, gross profit is usually much lower than net income (the final bottom line number you hear about in financial reports).
What About Investment Income? Is it Part of Gross Revenue?
A business may receive income and capital appreciation from stocks, bonds, and interest-bearing deposit accounts. Although these are all 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 brings in from operations alone.
Start Improving Your Business’s Performance
Now you know what is gross revenue. 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 to become a successful business owner.
Businesses looking to increase their sales can find help from Camino Financial. We offer loans you can use to open a new location, launch an advertising campaign, or expand your business. We have the resources and services you need to succeed.Apply for a business loan
Does gross revenue include tax?
Yes, gross revenue generally includes any applicable taxes.
The exceptions to this rule are usually specific cases where the company does not collect the taxes, such as in the case of untaxed sales.
In these cases, the gross revenue would not include the tax amount.
Does gross revenue mean profit?
Gross revenue is not synonymous with profit. Profit is the amount left over after paying all the costs associated with producing and selling a good or service. This includes materials, labor, rent, advertising, and other overhead expenses.
Gross revenue is the total money generated by selling a good or service. It includes the revenue earned from sales that result in a profit and those that result in a loss.
What are items that make up gross revenue?
The items that make up gross revenue can vary from company to company. However, some of the most common contributing factors to a company’s gross revenue are product sales, service fees, and interest income.
Where should I put gross revenue on a company’s income statement?
There is no definitive answer to this question as it will depend on the specific circumstances of your business. However, some companies include gross revenue as a separate line item on their income statement, while others combine it with net sales.
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