What Is Gross Revenue? - A Definitive Guide
Establishing and sustaining a successful business requires much more than selling good products and services and having good customer relationships.
Business operators must understand the nitty-gritty of financial analysis.
They must at least know how to create and examine financial documents to use the metrics gotten for organic business growth.
Business owners and operators will use gross revenue extensively in financial documents, and it is vital to have a good knowledge of what it is.
This article is a clear-cut guide on all you need to know about Gross Revenue.
What Is Gross Revenue?
Gross revenue, also known as gross sales, is the total amount of sales, money, or earnings generated by a business within a specified period before any deduction is made. A gross revenue could be within a quarter or a year.
The gross revenue does not account for any cost incurred before or during sales.
A company typically has three statements: The statement of income, the balance sheet, and the statement of cash flow.
The gross revenue is sometimes referred to as ‘top line’ because, as the name implies, it is usually at the top line of a company’s income statement.
What Is Gross Annual Revenue?
Gross annual revenue is the sum of all earnings over a year without deducting expenses or costs.
In 2020, the U.S. government's total revenue reached about $3.42 trillion.
6 Things That Can Make up a Gross Revenue
- Money from sales of goods and services
- Money from sales of shares
- Money from sales of property
- Interests
- Royalties
- Money from sales of excess equipment
What Is Actual Gross Revenue?
This is the total revenue that is computed and documented following the generally accepted United States accounting principles (GAAP).
Actual gross revenue does not include sales taxes.
Importance of Gross Revenue
Understanding revenue is significant for anyone in the finance field who owns or runs a business. More so, understanding gross sales.
Below are some benefits of gross revenue.
Shows Productivity of a Business:
Gross revenue is a crucial aspect of a company’s income statement that gives insight into how productive a company or business is. It helps to analyze how you are converting your resources to booming sales of products and services.
Helps to Get Gross Profit:
Gross profit is simply gross revenue or sales minus the direct expenses used to generate them only.
It is also known as gross income.
Gross Profit = Gross Revenue - Cost of Goods Sold - COGS (Direct Expenses)
Direct expenses include material and labor costs.
Knowing the gross profit helps to see the profitability of a product at a time.
Example:
If you make and sell pizza for $12 and it costs $5 to get the raw ingredients, your gross profit is $12 minus $5 =$7.
Helps to Get Net Profit:
Net profit is the total gross profit minus all other expenses. Other expenses include electricity bills and rent fees.
Net Profit = Gross Profit - Other Expenses (Overheads)
Example:
You make $12,000 a month from selling pizza and your cost of goods sold that month is $5,000. What is your net profit if your monthly overheads amount to $1,000?
Recall:
Net Profit = Gross Profit - Other Expenses(Overheads) and
Gross Profit = Gross Revenue - Cost of Goods Sold - COGS (Direct Expenses)
Therefore, Net Profit = (Gross Revenue - Cost of Goods Sold) - Overheads
Net profit = ($12,000 - $5,000) - $1,000 = $6,000
Helps With Long-Term Strategy:
Keeping track of your gross revenue over time allows you to compare trends and sales volume to implement new strategies for your desired outcome or productivity.
What Is Net Revenue?
Net revenue, also referred to as net profit, is the amount left of the gross revenue after deducting the total expenses incurred over a certain period.
Wholesale and retail businesses sometimes use purchasers’ discounts to lure customers into buying products and services. These discounts are factored in when calculating the net revenue.
Let us consider the simple example below.
Jack has a face cap brand and has not sold up to his expectations in a long while.
He currently has $10,000 worth of face caps and has decided to sell all of them at a discount of 40% each. After a quarter, he was able to sell everything off.
His net revenue for the quarter after product sales will be $6,000.
The 40% discount will amount to a loss of $4,000. Subtracting $4,000 from $10,000 amounts to $6,000.
The Difference Between Gross Revenue and Net Revenue
The difference between your gross and net revenue is your business’ expenses (cost of goods and overheads).
Gross revenue includes all sales and earnings; meanwhile, net revenue or net profit has subtracted overheads and cost of goods.
Some of these expenses are also known as overheads.
What Are Overheads?
Overheads are business costs spent for a business's day-to-day running.
They are not operating costs because they support the general revenue-generating activity of the business and not just a specific business activity.
Types of Overheads
These are business costs that do not change according to business profit level.
Examples include salary and rent.
These costs reduce or increase based on a business’ activity.
Some examples include advertisement costs, legal fees, and maintenance of equipment.
A semi-variable overhead possesses characteristics of both fixed and variable overhead.
These costs might come in the form of a base fee (no matter the activity level) and an additional variable cost. This variable cost comes with the level of usage or business activity level.
A few examples are electricity costs, water costs, and vehicle usage.
How to Calculate Gross Revenue
We calculate gross revenue by multiplying the price of one product or service by the total number of products and services sold.
Gross Revenue = (Price per product) x (Total number of products) or
Gross Revenue = (Price per service) x (Number of customers)
Gross Revenue Calculation Examples
Let us consider different examples.
Example 1:
You sell a shirt for $10.
If it costs you $6 to make and perhaps, deliver that shirt, then your gross revenue is $10. We do not consider expenses, so our answer is $10.
Example 2:
Adam owns a translation agency that charges $50 per short-form translation.
If he gets 500 customers in one month, what is his monthly gross revenue?
Gross Revenue = (Price per service) x (Total number of customers)
Gross Revenue = $50 x 500 = $25,000
Example 3:
Linda sells shoes. They all go for the same price; each one is $60.
If she can sell 70 shoes in a quarter, what will her top line be for that quarter?
Top line is the same as Gross Revenue and Gross Sales.
Top line (Gross Revenue) = (Price per product) x (Total number of products)
Top line (Gross Revenue) = $60 x 70 = $4,200
Gross Revenue Reporting
A good business or company must report its gross revenue on the income statement.
This gross revenue report must not include any costs or expenditures.
It is a report that shows solely the summation of products or services sold in a particular period.
Net Revenue Reporting
In contrast to gross revenue being the top line, net revenue is the bottom line of your income statement.
It considers all expenses such as overheads and the cost of goods sold (COGS).
Related FAQs
Are gross revenue and gross income the same thing?
No. They are not.
Gross revenue is the same as gross sales, the total sales or money from products and services. On the other hand, gross income is your gross revenue minus the cost of goods sold.
Does gross annual revenue have to start from January?
No, it does not.
Your income statement can start on June 1st, 2022, and end on May 31st, 2023. By implication, your gross revenue is annual.
As long as it is a 12-month period of time, it qualifies as gross annual revenue.
What is gross margin?
Gross margin is gross profit divided by gross revenue multiplied by 100. We express it in percentages.
Mathematically, Gross Margin = (Gross Profit / Gross Revenue) x 100%
Recall: Gross Profit = (Gross Revenue - Cost of Goods Sold)
Therefore;
Gross Margin = ((Gross Revenue - Cost of Goods Sold) / (Gross Revenue)) x 100%
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