The main aim of most, or all, businesses is to generate profit or income. We all know this. What is less clear to many people, however, is all the different ways that income is broken down, examined, and recorded. There are various components that are a part of income calculations, including different metrics. One such metric is sales revenue. So what is sales revenue?
In short, sales revenue is a metric that helps us to make sense of the cash that comes into any given organization. However, it is, of course, not that simple. Read on to find the answer to the question “what is sales revenue?”. We’ll detail the figures that are encompassed in the metric, how to work it out, and everything else you need to know.
What Is Sales Revenue? An Explanation
Instead of jumping straight into the deeper details of the subject, first, we should talk about the definition of sales revenue. Essentially, sales revenue is the money generated by an organization through its sales activities, whether that happens through selling physical goods or by providing services. This metric is calculated for a predetermined period, it could be every year, quarter, or month.
We must mention here that while it is possible to use the words “sales” and “revenue” to denote the same thing, “revenue” does not always mean funds gained. A part of the sales revenue is generated from the money that has been settled, however, other parts could be received on credit through accounts receivable, for example.
There are two different types of sales revenue. These are gross and net. They both can appear on an income statement (which we will discuss later on). However, each variation has a different calculation and each is used to make different inferences about the business.
Gross revenue is the total amount of cash that a company generates through sales. This metric indicates the organizations’ capability to sell their products. However, it doesn’t really signify the capacity to bring about profit.
Conversely, net sales revenue is the number you get after you take away all deductions from the gross sales revenue. These deductions can include returns of items and bad debt expense. As such, net sales revenue is a more precise depiction of the income generated by an organization.
The Formula For Calculating Sales Revenue
Of course, a key sub-question on the topic of “what is sales revenue”, is about how to work out the metric. Calculations are often where many people get lost or start to panic, but that does not need to be the case here. There are two main formulas to take note of.
The first is for the calculation of sales revenue at companies where sales revolve around physical items. The method is as follows:
Units sold x average sale price = sales revenue
The second is for the calculation of sales revenue at companies where sales revolve around services. The method is as follows:
Total number of customers x price of services = Sales Revenue
Using these formulas, you can easily calculate your sales revenue.
The Relationship Between Sales Revenue And Income Statements
The initial line on the income statement will show your sales revenue. For those beginning with gross sales revenue, this is significant because it is the beginning point for coming to your net income. With gross sales revenue depicted at the head of the statement, all deductions will occur just below. Deductions include the cost of sales, taxes, expenses, and more.
Once the net income is calculated, you will be able to generate cash flow statements or calculate earnings per share, for example. These are also crucial business practices, and it is impossible to do them without calculating the net income on the income statement.
Another reason you should be aware of the sales revenue and income statement relationship is that it connects to forecasting.
Basically, while the forecasting process is occurring, all line items below the sales revenue (at the beginning of the statement) will be conveyed as percentages of this revenue. The historic trends are then examined and upcoming revenue is predicted based on this.
As such, it can be considered as the most significant line item on the statement and is a reference point for predicting the future of other figures on the statement.
Revenue Versus Sales Revenue
To make things a bit clearer, we should differentiate between revenue and sales revenue. While they may sound similar, they are not the same. So, what is sales revenue? By now you know that it is the funds generated from sales activities.
Then, what is revenue? Well, companies earn money in other ways apart from just sales, or rather separate from their core functions. For example, an organization may earn interest, and while this is not generated by sales, it still counts as part of revenue. It is called indirect revenue or non-operating revenue.
This indirect revenue is not added to gross revenue. It is not added to the number that sits on top of the income statement.
Why Is Sales Revenue Important?
So now that you’re aware of the finer details of sales revenue, it may be useful to spend some time convincing you to actually commit to doing the calculations for your organization. You may not be aware of it, but accurately calculating and recognizing sales revenue has a lot of benefits. And, these benefits can be leveraged to better your organization in a few ways.
Your organization can use the sales revenue metric to figure out how profitable the main activities of the company are. This can assist in choosing which activities are really worthwhile.
By breaking down your sales revenue into categories, you will see which products are doing well and which are not. From there, you can decide what products should be canceled or whether your production should increase on some of your items.
This one is less of a benefit and more of a requirement. In various jurisdictions, sales revenue is an important figure to consider in tax preparation. Since taxes are the responsibility of the organization, it is important to know your sales revenue so that you can prepare well for tax season.
Acquiring Various Contracts Or Loans
At times there will be opportunities that only certain businesses are eligible for. A common requirement is that businesses fall under a specific revenue threshold. As such, a sales revenue calculation can help you determine whether you qualify for these opportunities or not.
To reiterate a point made earlier, sales revenue is an important metric for forecasting. As such, correctly calculating sales revenue is the basis for good decision-making in businesses.
When you use this figure to generate forecasts, you can direct decisions and plans based on data to ensure that you are going in the correct direction with your activities and therefore your growth. You’ll know how much money is expected to come in, which means you’ll know what you can afford too. To learn more about forecasting, read our articles on sales forecasting and revenue forecasting.
Now that you can answer the question “what is sales revenue?” it’s likely clearer that understanding and accurately calculating sales revenue is an important activity for every organization. Apart from the metric being a necessary figure on your income statement, it also can bring your organization many benefits. For example, it allows you to understand your profits and products better.
With that being said, you should start calculating your sales revenue today, to ensure that you leverage all the benefits that come with the activity.