Before applying for a small business loan, you need to prepare some paperwork. Here’s what you must do.
Revenue is shorthand for sales, but the term is often confused with income and profits.
What is revenue?
The word “revenue” describes the total amount of money received by a business during a specified period. This includes all of the money that the company’s business activities generate — in other words, its sales of goods or services.
Using a basic formula, companies calculate revenue by multiplying the number of units sold by the price of the goods or services. For example, if Company Y sells 100 units of Product A at a price of $150 per unit, Company Y’s revenue equals $15,000. Revenue is often referred to as a company’s “top line,” in reference to its position on the company’s income statements.
In many companies, revenue is subdivided to identify the divisions generating the money. Revenue may also be divided into one of two categories: operating revenue, which comes from the company’s main business, and non-operating revenue, which comes from secondary sources such as investment earnings or money awarded from a lawsuit.
Companies use gross revenue to reflect total revenue, and net revenue to indicate revenue with any discounts subtracted.
For example, if Business Z sells 50 tables at $150 each, but it offers a 20 percent discount to boost sales, the gross and net revenue would be different. Gross revenue equals total number of sales times unit price, while net revenue equals gross revenue times actual price sold. Using Business Z as the example, the gross and net revenue formulas would be as follows:
- Gross revenue: $50 x $150 = $7,500
- Net revenue: $7,500 x 0.8 = $6,000
Some financial terms seem as though they could be used interchangeably. For instance, revenue, profit and income all suggest positive cash flow. Yet, they have nuanced distinctions.
While revenue represents the total amount of money generated by a company’s operations, which may include the sale of services or products, the term “income” refers to the company’s bottom line. To calculate income, subtract expenses from the revenue. Common expenses include:
- Operating expenses such as utilities and payroll
- Interest paid on company debts
- Payments for lawsuits
- Cost of goods sold (the material and labor used to produce goods)
The basic formula for calculating income is as follows:
Total revenue – expenses = income
For example, if Corporation X has total revenue of $100,000 and expenses that total $56,000, its income equals $44,000.
Like income, “profit” is considered to be a company’s bottom line. To calculate profit, or net profit, subtract all debts, operating costs and expenses from the company’s revenues.
Example of revenue
Revenue quantifies the gross activity a business generates without taking expenses or operating costs into account. This makes it possible for a company to have positive revenue and a net profit loss if expenses and debts outweigh the revenue.
Some companies use an accrual method of accounting to calculate revenue based on when the services or goods are delivered to customers. The cash method of accounting recognizes revenue after customers pay for those goods or services.
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