Revenue, sometimes called turnover, is the total income generated by a business from the sale of goods or services. This vital indicator is critical for determining an organization’s financial performance. 

 

Understanding Revenue

Revenue is often mentioned in conjunction with profit as these could represent two sides of the same coin. 

It is best to think of revenue and profit in terms of the top line and bottom line. As we know, revenue is the income generated. Profit is the remaining cash flow after expenses. Therefore, if revenue exceeds the yearly expenses, the business will record a profit.

Creating profit and loss statements allows you to understand your revenue, expenses, and profit. This statement provides a kind of map that details the coming and going of money by category over a defined period of time. An “Income Statement” is the proper name for what is commonly referred to as either a “Profit & Loss” or a “P&L.” 

This information allows you to make informed decisions on your business because you can see which parts of the company are doing well and areas that need improvement. 

 

Types of Revenue

In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard of accounting practice or the rules established by a government or government agency.

There are two types discussed below.

Operating Revenue – which is the money a company generates from its primary business activities.

For example, a soap manufacturer derives its output from soap sales. A surgeon produces a return based on the medical services they provide.

Separating operating from total revenue allows one to gain insight into the productivity of the business operations. One can see profitability down to the individual team member or sales associate if using a system that supports that type of transaction tagging. 

 

Non-Operating Revenue – is defined as the money generated from outside a company’s primary operations. 

This income tends to be infrequent and even unusual. 

Examples of non-operating gains could be interest earned from the sale of assets, dividend income, or lawsuit proceeds.

This income cannot be classified as cash flow because the amount will be inconsistent the following year. 

Separating an organization’s operating and non-operating funds will give investors a clear picture of the financial health of an organization. 

 

Calculate Revenue

The best way to calculate a company’s revenue is to sum up the organization’s amount earned. 

We’ll explore two formulas today. But before we get to the number crunching, it is important first to calculate how many units were sold and the average price per unit.

Total Revenue is all income generated from the total sales of goods and services regardless of source. When looking at total revenue, you are looking at both operating and non-operating sources.

Total Revenue equals price time quantity sold

Total revenue or TR is significant because it gives a high overview of consumer demand. Which overall, it helps a business determine the price of a product or service.

By looking at TR, we can perform a more complex revenue analysis that will allow the business to project its profitability while keeping its operating expenses in line with sales growth. We can also see which products and services are resonating, and which are not.

 

Sales Revenue is the portion of total revenue that comes exclusively from sales of goods or services. This excludes revenue generated from any other income stream other than sales.

Sale Revenue equals number of units sold times average cost per unit

Sales Revenue is crucial because we can consistently compare past and future performance. This information becomes an important KPI in forecasting and planning a strategy as we advance.

For example, if I sell 1000 bags of flour in April, each bag retails at $5, then my sales revenue during this period is $5,000. This number is before any expenditures are taken out. In looking at this raw number over time, I am able to determine if my price is too high or low.

Since Total Revenue is also looking at non-operating income, this can skew the accurate picture of a company’s performance. Herein is why sales revenue provides a clear view of revenue generation.

Bottom Line

Revenue is the most fundamental accounting metric for your company. Yet, it is rarely understood perfectly. The more you know how revenue is calculated, the easier it will be to earn more year after year. 

Income may come from different sources (such as new product lines or services offered) and is observed from different perspectives. Overall, steady growth earnings over time increases an organization’s credibility and profitability in the eyes of investors and lenders. 

Some companies calculate their revenue and income manually. However, many companies have started to automate their accounting system. FINSYNC’s all-in-one cash flow management system will facilitate the preparation of the company’s financial statements to generate reports including Income Statements quickly and accurately.

 

Visit FINSYNC to get a quick refresher on common accounting terms and concepts.