How To Calculate Revenue? – Explain With an Example
May 26, 2023
How to calculate revenue?
When doing any business, you have to check the profitability occasionally. The process of checking profitability requires an understanding of how revenue works for a business.
Businesses tend to have different types of revenue models. These models also tend to get more complex as the business moves forward. Also, once you have the revenue model and the calculation figured out, you will be able to use it to improve future assessments of the business’s profitability.
So, if you are thinking about calculating revenue, go through this article to learn more about the same.
What Is Revenue?
Revenue is a company’s gross income by selling its products or services. Now, the simple and general question most learners ask is – how to solve for revenue. The simplest way to solve a business’s revenue is by multiplying the number of sales by the sales price or the average sales price.
But, all revenues do not work the same way. There are different types of revenues, and they work differently. You should also be able to differentiate between different types of revenues. Understanding how revenue works for your business is vital to its reporting and accounting.
Revenue Formula
So, how to calculate revenue? You need to follow the formula stated here for that.
Revenue = Sales multiplied by Average Sales Price or Price of Service)
Let’s say that you are in the shoe manufacturing business and you have sold 100 shoes in a week. If each of those shoes is priced at $10 (hypothetically), then your revenue in that month will be –
100 x $10 = $1000
This is the simplest way to look at the revenue of any business. However, the model becomes more complex for different businesses. You have to calculate both the gross and net revenue to prepare a financial planning and check profitability.
Read More: Gross Sales – Gross Sales Definition And How To Calculate It!
What Is Total Revenue?
Total revenue is the complete income a business generates within a specific timeframe regardless of the source (whether marketing, sales, customer success, or investment.)
It is the highest amount a company generates from all of its earning sources. The total revenue is always more in number compared to sales revenue. Businesses get a clear understanding of the relationship between consumer demands and the pricing of the company’s products or services.
This revenue is calculated using the multiplication of the quantity sold with the price. It is different from sales revenue.
What Is Sales Revenue?
Sales revenue can be seen as the subset of the total sales. This revenue counts the amount earned only t through the sales of the products or the services of a business. They do not count the other revenues, such as interest on the cash deposited in the banks. We can say that all sales generated are revenue. But not all revenues are generated from the sales.
What Are Other Revenues?
Financial statements consist of different statements. A section called Other Revenue is also there. Businesses have other sources for earning a specific amount in revenue as well. These sources are not related to the revenue-generating operations of the business.
These revenues are usually collected by a store or a business renting out their properties like buildings equipment. The revenue generated from these sources does not count as sales revenue. These revenues are listed revenue from other sources or other revenues
What Are Recording Revenue?
Businesses also make a certain amount in sales without getting the amount during the timeframe of creating the financial statement. For example, customers often buy any merchandise or service that they pay for using credit cards. The amount gets credited to the business’s account later.
Does that mean that the company will skip this amount during the preparation of the financial statement? No, in this case, they will create an “accounts receivable” section in the balance sheet. Once they receive the amount from the customer, they will decrease the amount from the accounts receivable section. But this does not increase the revenue since the amount has already been included in the balance sheet.
What Do You Use Revenue Reporting For?
There are total sales, net sales, and other revenues that get calculated during the preparation of the financial statement. This means that revenue reporting is decisive for a business.
Revenue is crucial for analyzing a business’s overall performance through gross margin (cost of the goods sold) and gross margin percentage. This ratio helps analyze a company’s profit amount after removing the cost of merchandise sold. But the calculation is also done before accounting for the amount for other expenses.
But there are different types of companies with different levels of complexities in how they handle their revenue. For example, businesses might want to lower the merchandise cost. As a result, their top-line margin would appear larger. To do so, companies usually lease their merchandise or offer them at a premium. Such a method would help them incur a higher net revenue amount than if they simply sold the product or service at the base value.
The Bottom Line
The initial answer is pretty simple when you ask how to calculate revenue. All you have to do is multiply the sales amount by the product’s base or average price. However, accountants usually adjust these numbers legally, making it necessary to understand the company’s financial statement for a clearer understanding of the revenue. A clearer look at the financial statement helps investors understand different factors affecting a company’s revenue in different quarters.
I hope the information you sought was available in this article. However, if there are any additional questions you need us to answer, please comment below. We will address and answer them in due time.
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