By: First Union
Revenue - How to Calculate it
As a business owner, you need to stay on top of the financial health of the company. One certain measure of how well a company may be doing is to understand exactly where the revenue is for a given period. And yet calculating it may not be as straightforward as it might otherwise seem. There are a couple of different types that businesses need to keep track of, and the calculations do vary. In this article, we take a look at the various types of revenue and the calculations associated with each.
What is revenue?
Defining what exactly is meant by revenue is key to understanding the importance of this particular metric. Essentially, the basic definition is the amount of income that a business brings in during a specified period. For some, this is the most important figure on the income statement as a business cannot run without money coming in. Again, there are different types of revenue to consider and to help business owners better keep track of the progress the company is making or on the flip side, where improvements may need to be made in terms of where the business is flagging.
Net Revenue and Gross Revenue
Perhaps the key types of revenue that are measured for any company are net and gross revenue. When it comes to taxes it is particularly important to differentiate between the two.
Gross revenue represents income generated from sales without accounting for any expenditures taken out. So in this way, you are isolating the sales numbers and not factoring in the cost of goods sold. Let's say a furniture store sold a sofa for 800.00. The gr for that sofa regardless of the cost to get it to the showroom floor would be 800.00.
Net revenue is known as the bottom line as this is its position on the income statement. With it, you do subtract relevant expenditures, so this would be the cost of goods sold. The COGS is anything that costs money to make/sell that product; things such as raw material, inventory costs, labor, and shipping costs, among others.
Most accountants in calculating gross revenue will use the following formula if they are dealing with a product based company:
GR = Units Sold x Average Price
Service-based businesses are different when calculating gross revenue:
GR = Number of Customers x Average Price of Services
Below is an example of a product-based company:
A company sells energy bars at 1.50 per bar. The number sold equals 550. Their gross revenue is, therefore: 825.00
Calculating net revenue is, as noted, a bit different:
Net Revenue = GR – COGS
Below is an example of net revenue:
A table maker sells a table for 2000.00. In materials, it cost 400.00 to make. Therefore the net revenue on that table is 1600.00.
What to Do About Loss
Especially in the early stages of a company's life cycle, generating adequate revenue can be tough. And many small businesses subsequently have difficulty keeping a positive net revenue. Some numerous factors and exigencies can impact that bottom line. So why are you losing money? Why is net revenue in the negative? Here are a few reasons why your business may be losing money and consequently not realizing a positive revenue.
Need Pricing Adjustment
Some over-eager business owners may overvalue their product and this leads to pricing too high. While yes, this may help you realize a higher net revenue, if the goods aren't selling because customers get turned off by the high prices, then you're going to be in trouble. By the same token, if you drop prices too low, this will also impact net revenue. You may be selling more, but where does your profit margin stand then?
You Need to Bolster Online Marketing Efforts
Almost across the board, people take to the internet first to check out a productservice before purchasing that product or service. If your online presence isn't as robust as it should be, then you need to start thinking about how consumers might find you. It is not going to happen by chance. You need to put some effort into marketing your brand online and thereby getting in front of the right audiences. From implementing SEO practices to updating your social media accounts, to upgrading your website and making it more relevant and modern, these are things your business can start doing to help boost revenue.
Keep in mind also, that the better your online presence, the more social proof you will be able to provide customers. Consumers are always going to listen to the reviews. If you're staying on top of your game and offering first-class customer service, this will lead to more positive reviews which in turn help drive sales and thus increase your money.
Not Targeting the Right Customers
If you lack conversions even though you're getting your fair share of clicks, then it could be your target demographic is off. Are you targeting those consumers who would be most apt to buy from you? Even though web traffic is up doesn't necessarily mean this will equate to more conversions and sales.
If for instance, you're doing pay per click advertising, you will want to check on the keywords you're employing. Are they geared toward the right customer base? Of course, you don't want to focus solely on keywords that are sales driven; you want to offer informative topics and content on your site as well. But at the same time, you need to keep your eye on those conversions and/or lack thereof. It comes down to a careful balancing act between getting those conversions and also increasing brand awareness for your company.
Need to Focus More On Brand
Speaking of brand awareness, for those companies not doing much to get that brand and brand message out there, this can also lead to less than stellar net revenue numbers. You might want to spend some time creating customer personas. To this end, you'd define the ideal customer in terms of age, region, and income, among other factors. You would then craft a brand message that spoke to them directly.
To create an effective persona, you want to look at relevant data. Data analytics can help here. The more information you get regarding your ideal client, the better off you'll be in terms of positioning your brand for them.
First Union Lending works with small businesses, helping them achieve their goals and consequently thrive and grow. Call today to see how we can help!