What is revenue? How to calculate revenue
Revenue refers to the money a business receives from the sale of goods and services to clients and customers. The term also refers to income from royalties and interest. We also use the terms sales and turnover.
In accountancy, revenue is related to a specific period, such as a year, quarter, or month.
We also consider an increase in owner’s equity over a given period, before subtracting expenses, as revenue.
The Financial Times glossary has the following definition of the term:
“Money received during a particular period. In the sense of a company receiving payment for its goods or services, same as sales or turnover.”
In businesses, the following are examples of revenue:
- The sale of goods – as occurs in manufacturing or the retail business.
- Fees for services – as in a hairdresser or law firm.
- Fees and interest income from lending assets – as in car rental companies and banks.
- Growth from investments – e.g., interest-bearing deposit accounts and stocks and shares that were purchased.
For a government, the term refers to the money it collects from taxes. It also collects money from licenses, fees, fines, and the printing of reserve bank currency.
Non-profit organizations such as charities and churches use the term ‘gross receipts.’ For-profit organizations exist to generate profit, unlike non-profit ones.
Gross receipts include money that companies or individuals donated, grants, and other awards from government agencies. It also includes income from activities related to the organization’s mission, fundraising, membership fees, and growth from financial investments including stocks and shares.
How to calculate revenue
These are the steps necessary to calculate the revenue of a business over a specific period.
- Calculate the selling price of each unit of a product or service sold by the business.
- Calculate the total number of units sold.
- Multiply the selling price of the units by the amount sold to determine the revenue a particular unit generated.
- Add the revenues of all units together.
For example, let’s look at this fictitious company below.
XYZ Bakery – sells loaves of bread, croissants, and spongecakes.
Let’s start by examining the selling price of its products:
- Selling price of a loaf of bread = $3
- Selling price of a croissant = $1.50
- Selling price of a spongecake = $5
Now let’s look at the number of sales of each product over a period (in this case it’s the first quarter of the year).
- Number of loaves of bread sold = 10,000
- Number of croissants sold = 4,000
- Number of spongecakes sold = 200
We now multiply the selling price by the number of units sold to determine the revenue each product generates.
- Revenue from loaves of bread = $30,000 (3 x 10,000)
- Revenue from croissants = $6,000 (1.50 x 4,000)
- Revenue from spongecakes = $1,000 (5 x 200)
The total revenue over the first quarter of the year can be calculated by adding up the revenue generated from all units of the business.
So, we add the revenue from the loaves of bread ($30,000) with the revenue from croissants ($6,000) and the revenue from spongecakes ($1,000) to calculate the business’s total revenue over the first quarter:
Total first quarter revenue for XYZ Bakery = $37,000 ($30,000 + $6,000 + $1,000)
Revenue vs. income
There are two main types of income:
- Gross income – this is usually the same as gross revenue.
- Net income (profit) – this is gross income minus business expenses.
Put simply; net income is a company’s profits, i.e., the amount of money the business has left over. Specifically, money left over after paying the costs of doing business.
Raw materials, interest on loans, wages, rent, and utilities, for example, are costs.