Revenue is the main source of income for any entrepreneur. The proceeds from the sale of products complete the production cycle of the entire enterprise. It proves the viability of an entity and completes the cash flow of any business venture.
Sales revenue is all the money you received from doing business: selling goods, providing services, performing work, cash, and non-cash. When determining revenue, expenses incurred are not taken into account because when we talk about revenue, we mean money received for goods/services/works. After you subtract all expenses from the revenue and add in the other income, you have a net profit or loss. Sales revenue can be positive or zero, but not negative.
Business owners plan sales revenue for the month, quarter, and even a year in advance. You can calculate these amounts, knowing parameters such as the seasonality of sales, months of stagnation and increased demand, the volume and speed of supply of goods, productivity, etc.
It is worth mentioning that sales revenue can be recorded using two methods of accounting:
- The cash method is the accounting of revenue in the period of cash inflow.
- The accrual method is the recognition of revenue in the period of shipment/sale of a product or service, even if funds are not received.
Thus, keep this point in mind when doing the calculations.
How to Calculate It
Sales revenue is the sum of all financial resources a company received during the reporting period from the sale of goods or the provision of services. In this case, both the products of its production and the goods purchased to resell them, later on, are taken into account. In addition, it does not matter if the revenue was received right away or if the buyer will pay some time in the future. Both cash and credit sales are included in the calculation.
This indicator is taken as the basis when calculating net income, various types of profits from the main activities of the company. When doing the calculation, it is important to remember that it does not include expenses or receipts from non-operating activities.
The calculation algorithm is very simple — information on sales volumes and unit prices is retrieved from the bookkeeping records. If during the reporting period the price has changed, sales revenue is calculated taking into account each such change.
Let’s say you own a small coffee shop where you sell coffee, desserts, and baked goodies. During the day, your sales book has the following records:
- 10 cups Latte — $5.50 per cup
- 18 cups Americano — $4.80 per cup
- 8 cups Mocca — $5.60 per cup
- 5 Sandwiches — $9.50 per sandwich
- 3 pieces Chocolate Cakes — $7.90 per piece
- 4 pieces Red Velvet Cake — $9.90 per piece
Your sales revenue would be 10 x $5.50 + 18 x $4.80 + 8 x $5.60 + 5 x $9.50 + 3 x 7.90 + 4 x $9.90 = $297.05. If your cakes and sandwiches are sold at a lower price after, let’s say, 6 pm, then you need to calculate separately the revenue you received from sales before 6 pm and after 6 pm from the sale of these items.
Revenue vs Sales Revenue
Sales revenue is the main component of revenue/income, but not the only one. Other revenue sources of the company include income from investment and financial activities. So, in addition to income from business activities, revenue can also include payments from the sale of assets.
To give an example, you closed several coffee shops, sold expensive coffee machines and refrigerators. This money can be attributed to the proceeds of the period. To be able to have an idea of the sales revenue figure and see the net indicator for the main activity separately, you should record the sale of equipment as a separate item – revenue from the sale of fixed assets.
Sales Revenue vs Profit
Sales revenue and profit are completely different concepts. Sales revenue consists of profit and cost. To understand how to calculate the profit itself, you need to know the price formation formula: Selling Price = Cost of production + Seller’s markup.
To calculate the profit, you would multiply the markup amount by the number of items sold. The sales revenue, on the other hand, is the selling price multiplied by the number of items sold. Thus, the profit formula can also be stated as sales revenue less total cost. It should be borne in mind that the cost of a product implies only the costs of its creation, but in reality, it is also necessary to take into account the costs of advertising, promotion, rent, etc.
Why Is It Important?
Revenue is the main source of financing for the company, bringing material benefits and working capital the company needs to continue its activities and development. Sales revenue is the key indicator on the Profit and loss statement from which the calculation of the financial result of the business begins.
So, what can the revenue tell us at a glance:
- Overall demand for your product (service)
- Analysis of revenue for a separate item of goods in different store locations will help to make a decision on moving certain groups of goods from one location to another (where it is sold faster)
- What kind of product should be purchased or produced in a larger volume
- Comparison of revenue indicators for past and current periods allows you to assess how fast the development of the enterprise is, or maybe, on the contrary, if there is a decline and you need to urgently take action
- Having data on the current sales revenue of the enterprise, a manager or business owner can competently redistribute funds to pay bills, taxes, wages, and purchase a new batch of goods.
Sales revenue is the simplest metric used to assess the health of a company. Each manager and business owner analyzes its size, calculates other absolute and relative performance indicators on the basis of this value, forms a development strategy. It is used to calculate indicators such as break-even point, margin, return on sales, and others.
The strategic development of any organization is based on data on the planned scale of production, the price of implementation. These indicators are calculated on the basis of historical analysis, taking into account external factors. The sales revenue is an indicator that characterizes the dynamics of the company’s development.
