Gross Revenue - In Depth Explanation

By: First Union


Gross Revenue - In Depth Explanation

If you're a small business owner, then you know how important it is to stay on top of all aspects of your finances. Having a clear and up to date picture of the company's financial health will enable you to make smarter decisions overall moving forward. Not to mention, having certain figures and calculations at your disposal also helps in terms of showing you where adjustments may have to be made. One of the more important numbers you need to know is gross revenue. This is also sometimes referred to as the "top line." In this article, we look at the concept of gross revenue and also how you calculate it.

Understanding Gross Revenue

So what exactly is GR? Essentially it is the total that a business makes as a result of the products/services sold. Some may refer to it as gross sales as well. It is not the same as profit—when calculating profit deductions are taken. With GR, however, we are looking only at the sum of all of the business's sales over a given period. When looking at gross revenue, it's important to do so in conjunction with past years/reporting periods. This will help you to more effectively analyze how the business is doing.

Other metrics

There are several other figures and calculations that companies use to understand how they're performing and/or doing financially. It is thus important to differentiate gross revenue from some other numbers. For example, gross profit is different from gross revenue in that in arriving at the gross profit you are deducting the cost of goods sold as well as returns and discounts. Then there is also operating profit which starts with gross profit and subtracts any operating expenses. Gross revenue is a starting point for arriving at several key metrics.

Where Investment Income Comes In

While productservice sales may not be a business's only form of income—some get investment income from stocks, bonds, and interest-bearing accounts—these other types of income don't count within the same context. Again, this is strictly the total of all sales made by a business.

Calculating Gross Revenue

The formula for calculating GR is quite simple. It involves adding all income that came in during that reporting period based upon sales numbers. So for example, if a company sells 15,000 in products, has 2400 in returns, and spent 4000 in the cost of goods sold. The gross revenue here would just be $15,000.

The Importance of Gross Revenue

For some businesses understanding where gross revenue stands aren't as important as it is for others. It tends to be more important for service-based industries. This is because gross revenue does not factor in returns, and service-based companies naturally have fewer returns. With those companies that do sell products versus services, they have a higher rate of returns. So for them, gross profit may be the more important metric. And with newer businesses, because there aren't many numbers/metrics available, gross revenue is often a good starting point.

Keep in mind, when evaluating a business, you should not rely solely on GR. A company can still have high gross revenue and yet not be profitable. One reason for this is that company leaders could increase gross sales to the detriment of other factors to up the overall business valuation. Companies also have been known to launch new products to try and increase their sales numbers, and yet again this doesn't factor in expenses and so isn't necessarily a reliable indicator of how profitable a company may be.

When investors and/or lenders evaluate a company to better understand that company's financial position, they rarely look just at gross revenue, as again this isn't necessarily aligned with how profitable a firm might be. GR is however an important starting point as far as calculating more consequential metrics to be used in assessing a company's performance and financial well-being.

Gross Revenue versus Net Revenue

There are key differences that you need to understand when it comes to GR versus net revenue. When figuring out net revenue, all you're doing is taking gross revenue and subtracting any discounts and returns. Some retailers for instance who tend to have a large number of returns (clothing is a good example of this/), often have a fairly large difference between net and gross revenue. And as previously noted, with many service companies, where returns aren't necessarily relevant, their gross and net revenues tend to be much closer.

An Example of Net Revenue

So if we return to the previous example of a gross revenue calculation, the company had 15,000 in total sales. They also had 2400 in returns and spent 4000 as far as the cost of goods sold. Whereas the gross revenue in this scenario is 15,000, the net revenue involves subtracting out the returns. So-net revenue here is 12,600.

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