So how do these businesses arrive at such values? And what significance, if any, do the figures hold? This post seeks to answer that by breaking down: what gross revenue is, what it is NOT, how to calculate it, and why it's essential to recognize and record your business' gross revenue accurately.
Table of Contents 1. What is gross revenue? 2. What gross revenue is NOT 3. Why understanding gross revenue is important 4. How to calculate gross revenue 5. Recording gross revenue in your income statement 6. Key differences between gross revenue vs net revenue 7. Accurately recognize & report gross revenue with ProfitWell Recognize 8. Gross revenue FAQs
What is gross revenue?
Gross revenue is the money generated by all the business operations—be it sales of products, services, surplus equipment, shares of stocks, etc.—in a given duration, not accounting for any business expenses.
So if your company sold $5,000 worth of merchandise, and the sold products cost $1250 to make: the gross revenue is $5,000.
What gross revenue is NOT
To understand the term: it's good to recognize what gross revenue is not. More so relative to other business metrics it's commonly confused with, such as:
Gross revenue vs. gross profit
Gross revenue is the total revenue generated by a business without deducting any expenses and losses, while gross profit is the difference between gross revenue and the cost of goods sold (or services rendered).
Gross income vs. revenue
Gross income represents the total profits or earnings of a company, while gross revenue represents the total amount received by a business, not accounting for any expenses.
Unlike gross revenue, gross profit shows the company's ability to generate profit relative to its operational efficiencies.
Gross sales vs. revenue
Gross sales are all customer proceeds for the provision of services, goods, or both, whereas; gross revenue is the money generated by all business operations, including sales and investments.
In other words: Gross sales are a subset of gross revenue for companies with diversified income sources, such as royalties and interests.
Cash flow vs. gross revenue
Cash flow represents the amount of money flowing into and out of business for various reasons. Gross revenue, on its end, represents the money flowing into the business—be it from sales, interests, or royalties.
Cost of goods sold vs. gross revenue
Cost of goods sold is the total cost of materials, labor, and other expenses directly involved in making the products or delivering the service, whereas gross revenue is the value of all the sold products or services in a specified duration.
Why understanding gross revenue is important
Businesses need to create and analyze their financial statements to understand how they are faring. And gross revenue forms an essential piece of the puzzle, helping you with:
Tracking sales volume
Seeing that gross sales are a subset of gross revenue, the latter is handy in tracking sales volume to help determine whether your sales reps are hitting revenue goals and monitor whether your market share is growing.
Monitoring business performance to ensure growth
Tracking gross revenue at consistent intervals provides you with a bird's view of whether your company is growing or losing money. That, in turn, sheds light on your financial health and helps make strategic and data-driven decisions to better the outcomes.
Moreover, you can use gross revenue to compute other financial metrics—such as gross profit—to get an even clearer view of your financial health.
Analyzing business value
You can also leverage gross revenue to evaluate the viability of new businesses. (After all, the success of a startup is pinned on its ability to make money.)
Or, estimate your business value as a multiple of the last recorded gross revenue. (A figure that can make or break your company's stock prices.)
Identifying high-impact revenue channels
If you expand your gross revenue calculations to detail what marketing channels are contributing to how much revenue, you can use the insights to pinpoint high-impact revenue channels.
Note: Gross revenue as a business metric is better suited for service-based companies due to their lack of sales returns. In their goods counterparts, a flood in returns may indicate high sales revenue with little to no profit, which is unimpressive.
How to calculate gross revenue
To calculate gross revenue in a given period, say, a month: add up the sales revenue generated in that month to cash inflows from other company operations, such as royalties and investments.
Product sales revenue is the product of the average price of goods sold and the number of products sold.
Product revenue =No. of units sold x average price
For service companies, service sales revenue is the value of service contracts. I.e.:
Service revenue=No. of customers x average price of service
You can expand the gross revenue formula to include additional details. For instance, you can model the revenue forecast to capture individual product lines or sales channels.
Overall, calculating the gross revenue follows these basic steps:
1: Define the period for revenue calculation
You begin by specifying a time interval for your gross revenue calculation. It could be monthly, quarterly, or annually.
2. Identify the sources of income
Identify all the revenue sources your company had over the previously specified period. It could be sales of products, surplus equipment, shares, etc. It could also result from royalties, interests, and fees.
That means if you have a client who has signed for a maintenance fee of $45,000 over two years. And your company recognizes revenue every month, then your monthly gross revenue calculation will only feature $1,875 from the said client.
#3: Add up all income
Lastly, take all the income identified in step two above and add the resulting numbers to obtain your gross revenue.
Company A sells its products online and at a local boutique. If they made $15,025 in-store and $25,800 online in three months. And additionally made $2,654 in interest from investments."
Know your audience (investors or otherwise) to determine the "best" fiscal information to compute
Include all income be it from sale of products, services, or stocks.
Recording gross revenue in your income statement
The revenue recognition principle has it that revenue is recorded when service delivery is completed or when risks and benefits of ownership are completely transferred to the buyer.
So payment is not critical when recording revenue, which helps factor in goods or services sold on credit. As such, you can choose to record sales when you receive payment. Or, record items sold on credit as revenue and highlight them as cash receivables on the balance sheet.
When reporting gross revenue, ensure that all income sources are accounted for on the financial statement: sales, interests, royalties, fees, etc. At the same time, be sure to exclude any business expenses.
Next, consider the presentation. Will you denote it as a stand-alone figure? Or will you include more illuminating metrics such as net revenue?
Once done, record the calculated gross revenue on the top line of your cash flow or income statement. See the highlighted section from Amazon's income statement for the year 2021.
Key differences between gross revenue vs net revenue
Differentiating gross revenue vs net revenue is crucial for several reasons. One, it can help you escape significant tax repercussions.
Corporate taxes are based on leftover income—after deducting business expenses, known as net revenue.
Suppose your company sold products worth $45,000 in February. If you spent $18,500 on business expenses, your gross revenue would be $45,000 and your taxable income $26,500. With the current tax rate at 21% of taxable income, mistaking the two figures can see you take the tax percentage from a higher initial figure, resulting in $3,885 more in taxes.
The difference is also crucial when needing to pay commissions, say, to sales reps or affiliate marketers.
So what are these differences?
Gross and net revenue differ in several ways, including:
Net revenue is the difference between gross revenue and business expenses.
Gross revenue is the sum of all cash inflows.
On its end, net revenue is the difference between gross revenue and business expenses. Expenses such as:
Note: Dividend payments are not deductibles when calculating net revenue.
Unlike gross revenue, net revenue is reported on the last line to represent the remaining business earnings.
Despite the differences, gross and net revenue are essential in establishing a company's financial health. But recognizing and reporting them can be time-intensive, hence the need to leverage revenue automation tools like ProfitWell Recognize.
Accurately recognize & report gross revenue with ProfitWell Recognize
As seen throughout the post: you must solve the gross-revenue puzzle to have clear insights into your company's performance and growth.
And depending on your business, your revenue may be spread across multiple channels. (Adding to the list of things to recognize and account for when calculating total earnings.)
That can make the processing time-intensive, eating hours, if not days, of employees' work time.
ProfitWell Recognize steps in to eliminate such hassles through:
And that's not just from a regulatory perspective!
Even for private companies, accurately accounting deferred and earned revenue is essential to ensuring business operations run smoothly. It can also provide valuable insights into planning long-term financial strategies.
On the flip side: incorrect revenue recognition can damage a company's reputation, proving detrimental if the business is looking to go public.
The accuracy of your gross revenue forecast comes down to numbers—using accurate numbers. And when handling hundreds of spreadsheets with thousands of cells to counter check, there's a high chance of human error.
ProfitWell Recognize provides the necessary revenue recognition—deferred revenue, recognized, recognized from deferred, etc.—while eliminating errors that may sabotage the accuracy of revenue recognition. The tool also monitors and implements changes in IFRS 15, ASC 606, and other standards to result in an audit-proof GAAP following revenue recognition.
Better insight into revenue trends
Beyond revenue recognition, the tool helps track and monitor your gross revenue to gain insights into the company's financial health and revenue trends that can inform your decisions and facilitate improved outcomes.
Reduced time spent on revenue recognition
As noted, calculating gross revenue can be tedious and time consuming. (Especially when your business' income is spread across multiple channels.)
ProfitWell Recognize helps expedite the process, freeing your accounting team to focus on core business functions.
Customized revenue statements
Your business is unique relative to your products, industry, or even social cause. Understanding this, Recognized is adept at bringing whatever revenue statements are necessary for your finance team to head back to thinking strategically. It includes tax reporting, credit reporting, geography-based revenue recognition, among other revenue statements.
Annual revenue can be gross or net, or both. Gross means total while net represents leftovers after deducting business expenses. Whatever metric you choose to present your company's annual revenue, specify by adding gross or net before "revenue." The idea is to make it easy for the target audience to understand your calculations.
What does gross revenue retention measure?
Gross revenue retention measures the revenue lost from the company's customer base, not accounting for expansion revenue obtained from cross-sales and upsells. It denotes a business's success in retaining customers.
What is gross operating revenue?
Gross operating revenue is the money generated from a business' core activities. It could be sales of products or provision of services.
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