Gross revenue vs. net revenue is important and challenging for accountants. If not handled properly, it may result in severe income tax penalties. Although there is a lot of flexibility when it comes to recording sales revenue, all of it can be thought of as either “gross” or “net” in the end. Knowing the difference between the two is crucial, as gross revenue tells you only a portion of the story about your business. While budgeting cannot be based on your company’s sales, the net income gives a much more complete picture, but it’s hard to figure out what it means without knowing the gross revenue. If you’re finding it difficult to differentiate between the two, this article explains how to evaluate your company’s gross revenue. You will also get to know why it is important to do so.
What Is Gross Revenue?
Gross revenue is the total amount of money made by a business in a given period. This includes sales of products, services, surplus equipment, shares of stock, etc.
So, if your company sold $5,000 in merchandise and the sold products cost $1250 to produce, your revenue is $5,000. Gross income does not take into account any costs, such as the price of goods sold or administrative expenses. It is a simple calculation of the amount of money a company earns from any business.
Example: “Perfect Inks sold goods worth $200.” The inks cost $60 to produce. “The revenue of Perfect Ink is $200.”
Why Is Gross Revenue Very Important?
It is very important because it demonstrates the value of a company to its stakeholders. By looking at a company’s revenue, investors and other interested parties can easily get a sense of its financial health. You can also use the gross income to determine whether the company is a good investment.
Gross revenue is an important metric to examine when you want to evaluate a company’s profitability and overall financial performance. This is so because it is an indication of how well the company makes use of its resources, including manpower, materials, and money.
Limitations of Gross Revenue vs Gross Profit
Numerous factors can affect your company’s gross profit. This shift could be the result of:
- Changes in the products that result in high prices
- Effective business management results in cheap product sales.
- Some changes to a few accounting policies cause expenses to move from the cost of sales to overheads or vice versa.
- Vertical integration helps businesses save money on raw materials. Using Wipro as an example, total revenues and, consequently, gross profit keeps decreasing. These were the underlying reasons for it: A bankruptcy filing by a major client in the telecommunications industry and some delays in the progress of other, larger projects.
- Uncertainty about regulatory changes relating to the Affordable Care Act hurts sales in the healthcare and life sciences industries.
As a result, Gross Profit is an important metric. It assists us in determining the underlying causes of a change in the business’s profitability. So, it helps us take steps to fix the things that hurt the efficiency of a company.
Advantages of Gross Revenue
Some of the advantages include:
- It helps to figure out the total amount of money a business makes.
- You can use it to perform ratio analysis and draw meaningful conclusions.
- Gross revenue, when combined with net revenue, provides critical information about a company’s growth.
Disadvantages
Some of the drawbacks are as follows:
- The figure of a company’s revenue is not a true reflection of its actual turnover. It doesn’t account for discounts and revenue.
- The management may draw the wrong conclusions from a study of the revenue alone.
- Businesses typically report net revenue in their financial statements, making it difficult to calculate gross revenue from any company’s financial statements.
Gross Revenue vs. Net Revenue
The term “net revenue” refers to the money made after deducting expenses from “gross revenue.” You can use gross and net revenue to figure out how well a company is doing in terms of profits and costs.
Most times, the ratio of a company’s gross revenue to its net revenue is used to evaluate how healthy its finances are. Gross revenue and net revenue don’t tell the whole story about how well a company is doing financially. However, these metrics work best together.
“Perfect Inks’ gross revenue is $200,” for example. The net revenue is the difference between the gross revenue ($200) and the cost of goods sold ($60). “The net revenue of Perfect Ink is $140.”
How To Evaluate Gross Revenue
Here’s a rundown of the formula you can use to evaluate gross revenue: (price per product or service) x (gross revenue) (total number of products or services sold)
To evaluate gross revenue, follow these steps:
#1. Tally Up The Total Sales.
The revenue formula for a product-based business is gross revenue = (number of goods sold) x (price per item), while the revenue formula for a service-based business is gross revenue = (number of customers) x (the price of service). Both methods of calculating gross revenue begin with tallying up how many items were sold or how many people were served during the reporting period. Assume a soap manufacturer sells 3,000 bars of soap per month. This would be the total number of items sold.
#2. Take the Total Number of Sales and Multiply It by the Price Point.
To figure out sales volume, just multiply the average selling price by the number of units sold or customers served. For example, let’s say that the soap maker sells each soap bar for $2.50. Put these figures into the formula as follows:
(3,000 soaps sold x 2.50 each)= gross revenue
The same procedure would apply to a service-based business. For example, if a magazine subscription costs $100 per year for each subscriber, multiply $100 by the number of customers served by the magazine. Assuming the magazine has 15,000 subscribers, the formula would be as follows:
(5,000 customers) x ($100 for the subscription service) = gross revenue
#3. The Gross Revenue Is the Product of These Two Values.
Gross revenue is calculated by multiplying sales by the price point. So the soap shop that sold 3,000 bars of soap for $2.50 each will make $7,500 in profit. In the same way, the magazine subscription service will have a total gross income of $500,000. In the same way, the magazine subscription service will have a total gross income of $500,000.
Guidelines for Evaluating Gross Revenue
Here is a guideline to help you evaluate your company’s revenue
- Understand your target audience: Consider who the information is for when deciding what fiscal data to calculate. It is a useful number for investors and other external stockholders who want to know the company’s earning potential.
- Consider the following presentation: You can present it as a separate figure. But, it becomes more powerful and illuminating when combined with other data, such as the cost of goods sold and net revenue. After that, we use those percentages and margins to figure out how much money the business made.
- Include all earnings: Remember to include both traditional sources of income, such as in-store and online sales, and investment income.
- Keep track of gross revenue: Maintain consistent tracking of your gross revenue. This allows you to determine whether your company is growing or losing money over time.
How to Record Gross Revenue in Your Income Statement.
The revenue recognition principle says that revenue is recorded when a service is finished or when all risks and benefits of ownership have been fully transferred to the buyer.
You don’t need any payment when recording revenue, which helps in accounting. So, you can choose to record the Emerging Issues Task Force, or EITF 99-19, which talked about generally accepted accounting principles (GAAP) reporting standards for gross versus net revenue. for goods or services sold on credit. The Emerging Issues Task Force (EITF 99-19) looked at how generally accepted accounting principles (GAAP) say to report gross versus net revenue.
Is Revenue a Profit or a Sale?
Profit is the money an organization keeps after deducting all of its operating costs from its revenue. Revenue can take many forms, including sales, fee income, and property income.
What is Revenue On the Income Statement?
Revenue is the term for income generated by operations. Most of a business’s income comes from sales, but it can also come from fees, interest, real estate, taxes, donations, grants, investments, and other sources. In an income statement, revenue appears at the very top.
What is Profit On the Income Statement?
Profit, also known as net profit, is located at the bottom of an income statement. After taking out all operating and other costs from net revenue, the amount left over is the net profit. Net revenue only takes into account expenses that are directly related to revenue. On the other hand, net profit lowers revenue even more by taking out all other fixed and variable costs, such as payroll, rent, insurance, supplies, utilities, and maintenance.
Conclusion
The most important numbers on a company’s income statement are revenue and profit. The revenue of a business is called the “top line,” while the profit it makes is called the “bottom line.” While these two figures are important to consider when making investment decisions, investors should keep in mind that revenue is the income a company earns before deducting expenses. But when figuring out a company’s profit, you have to take into account all of its costs, such as wages, debts, taxes, and other expenses.
Gross Revenue FAQs
How do you calculate the gross revenue?
Here is the mathematical representation of it: To determine the total revenue, multiply the number of units sold by the price per unit. Gross sales are often used as a starting point for figuring out other parts of an income statement, like operating income and net profit.
What is an example of gross revenue?
Suppose you sold $11,500 in goods or services last month. This amounts to $11,500 in gross monthly revenue. Monthly gross revenue is the same as monthly gross sales. The monthly revenue does not include discounts on sales or returns of broken items.
What is not included in gross revenue?
Taxes collected from customers and remitted to the government (including sales taxes and other similar taxes but excluding any levied on the business itself or its employees) are not included in gross receipts unless they are also reported as part of total income.
Related Articles
- GROSS PROFIT PERCENTAGE: Definition, Formula & How to calculate
- NET PAY: How to Calculate Your Net Pay
- How To Calculate The Net Pay: Simple Guide
- Gross Profit Margin: Formula & How to Calculate the Gross Profit margin
- GROSS PAY: Definition and Formula
References
