Sales revenue is a commonly used metric in business and is frequently applied as a baseline in company valuation. Furthermore, it is a valuable indicator in setting revenue targets, forecasting, calculating growth and making long-term strategic decisions.
KEY TAKEAWAYS
- The most significant benefit of sales revenue is that it indicates the profitability and success of a company’s core business.
- Tracking sales revenue accurately provides the basis of the income statement.
- It is essential when calculating other KPIs, for example, customer lifetime value (CLV), days sales outstanding (DSO) and ROI.
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What Is Sales Revenue?
The terms revenue and sales revenue are sometimes employed interchangeably. However, there is a distinct difference between these two. The latter is revenue derived only from sales of goods and services, while revenue also includes income generated from items indirectly related to the company’s core business.
Sales revenue can be broken down into gross sales, i.e. the total sales generated by the company in the past accounting period, and net sales revenue, i.e. total sales less returns, discounts, and allowances for the accounting period.
This figure can determine whether a business is eligible for specific contracts or loans. In addition, it can indicate which areas of the company will be most profitable in which to invest. Therefore, business owners, managers, company directors and anyone involved in making financial decisions should understand how to work out sales revenue as a business metric.
Revenue vs. Sales
For example, revenue can consist of income generated from interest on bank accounts or dividends on investments unrelated to the sale of products or services. Therefore, revenue is classed as non-operational income.
Sales revenue is the first figure quoted on income statements, and for good reasons. First, this metric is the basis on which a business determines net income. In addition, it is a figure on which essential reports, including cash flow statements and earnings per share, are calculated.
What Is Total Revenue?
Total revenue is all revenues generated from the total sales of goods and services, regardless of the source of revenue such as sales, marketing, or investments. It is almost always higher than total sales revenue because it is the sum of all sources of revenue for a company.
How to Calculate Sales Revenue
The sales revenue formula calculates revenue by multiplying the number of units sold by the average unit price. Service-based businesses calculate the formula slightly differently: by multiplying the number of customers by the average service price.
Product-Based Sales Revenue Formula
Revenue = Number of Units Sold x Average Price
Service-Based Sales Revenue Formula
Revenue = Number of Customers x Average Price of Services
Calculation Example
Where a business sells goods and also provides a service, sales revenue is calculated as in the following example:
Stitchers Sewing Machines & Repairs
Product revenue: 25 Sewing Machines x £400 each = £10,000
Services revenue: 50 Sewing Machines Repaired x £50 = £2,500
Sales Revenue: £12,500
The critical thing to bear in mind is that it must derive from the company’s core activity. In this case, the sales revenue is the sale or repair of sewing machines, resulting in cash income for the business.
While sales revenue includes all the sales of goods or services, it does not necessarily always account for these sales in the current accounting period. Taking the example above, Stitches Sewing Machines sold and were paid for 25 sewing machines in October at £400 per machine, giving a total of £10,000. The business also repaired 15 machines in October at £50 per repair, a total of £750.
However, while the customers have paid for those repairs, the machines will not be returned to them until November. Therefore, the figures for the services of repairs for those machines will not be counted on October’s books. Instead, this deferred revenue will be recognized when the repaired machines are delivered to the customers.
How Is the Profitability of a Business Measured
The profitability of a business is measured by using the gross profit margin formula.
Gross Profit Margin Formula
Gross Profit Margin = (Net Sales – Cost of Goods Sold) ÷ Net Sales
So, we see that the gross profit margin is the gross profit expressed as a percentage of net sales. It is sometimes called the gross margin ratio. The profit remaining after the cost of sales is subtracted is known as gross profit.
The cost of sales, or cost of goods sold, is the cost to your business of stock or products sold during the accounting period on the statement. It may also refer to the direct cost of products manufactured by your company and includes the cost of labour and materials. However, indirect expenses and costs such as marketing, sales, and overheads are excluded from COGS.
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Sales Revenue and the Income Statement
A sales revenue model says that a business makes money by selling products and services. Therefore, this model applies to any company that directly sells goods and services online, by mail or in a brick-and-mortar retail outlet.
The first line of an income statement is sales revenue, which is an important metric. It is the starting point for calculating net income. The cost of goods sold is deducted from sales revenue to find gross profit.
Other costs such as depreciation and SG&A expenses are deducted from gross profit to arrive at the operating margin, sometimes referred to as EBIT. The operating margin minus interest expense gives you the pre-tax income.
Sales revenue should be listed on income statements together with other essential financial metrics. You can structure an income statement as a single-step income statement, with one category for income and one category for expenses, or you can structure a multistep income statement with income and expenses organized under different expense accounts. Pre-tax income minus tax is net income.
Single-Step Income Statement Formula
Net income = (gains + revenue) – (losses + expenses)
The net income of a business is calculated by subtracting expenses and losses from revenue and gains. A single-step income statement is a simple accounting method of assessing a business’s financial activity and is easily prepared and understood. These income statements are helpful when making a financial assessment, depending on profit or net income.
Single-Step Income Statement Example
However, single-step income statements do not provide a high level of detail. Therefore, they are not always appropriate for more complex businesses. Here is an example of a single-step income statement:
Seashells Gift Shop
Gross revenue: £50,000
Expenses: £35,000
Net revenue profit: £15,000
Increasing Sales Revenue
Determine Your Goals
Start by looking at the information you already have to plan where you want your business to be in the future. Look at the number of customers who purchased your goods or services during the past year. How much income did each customer bring in, on average? How quickly are your customer numbers growing? Consider the best-case scenario and the worst to set realistic targets. Finally, use your sales revenue metric to make more accurate financial forecasts.
Concentrate on Repeat Customers
When a customer makes a second – or third, or fourth—purchase from your business, they are more likely to buy from you in the future. Therefore, it pays to entice them to make repeat purchases with special offers, complimentary services or discounts.
Refine Your Pricing Strategy
Time-honoured tactics such as packaging your products in “bundles”, prices ending in “9”, and reframing the value of a service from annual cost to monthly cost can help stimulate sales revenue.
Offer Discounts and Rebates
Discounts and rebates encourage undecided customers to make a purchase. When marketed properly, rebates create an incentive for consumers to start buying. Discounts can be on limited products, such as volume discounts on two or more products, seasonal discounts, or discounts on all products in a store sale.
Use Effective Marketing Strategies
Target marketing growth strategies such as direct mail, email, and social media. A great way to improve sales and increase revenue is through online marketing. Analyse data about customer purchases and product preferences. Then develop targeted promotions based on strategic plans to reach specific customers with advertising messages and offers.
Review Your Online Presence
Review your online presence. Is your website well designed and easy to navigate? It’s important to check your online presence regularly. Review your websites and see how they are viewed on different devices. Analytics Tools can help you review your website traffic and develop plans to improve your customers’ online experience.
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The Benefits of Sales Revenue
Profitability
The goal of a business is to make a profit, and the prime driver of profitability is sales revenue. The more you grow your revenue, the more likely your profits will grow. To maximize profits, the trick is to achieve higher revenue levels while managing costs, so they increase at a lower rate. By optimizing revenue growth, you will generate more profit. Once your revenue has increased, you can make more profit, reinvest in your business, create new revenue streams, expand by merging or acquiring another business, and increase your company’s value.
Business Valuation
The valuation assigned to your company determines your capability of making transactional decisions about your business. For example, If you wish to sell your business, secure investment or a bank loan, acquire another business, or take the business public, the business valuation determines what the company is worth and how much you will either pay for or gain from these proceedings.
Customers
Ultimately, the proof of any business lies in the fact that customers are buying their goods or services. Customers purchase because they perceive value in your products, and retaining customers while acquiring new ones takes financial resources, hard work and determination. In particular, new businesses need to prove to investors that their product or service can generate revenue and scale it up in the future.
Employees
For your business to thrive, you need to attract and retain talented, reliable employees. They need to know that they will reap the benefits of working for a profitable company. Increased profits from sales revenues enable a business to offer their staff members better wages, a well-defined career path, performance bonuses and share options. Offering these incentives increases employee satisfaction and helps you retain an effective, well-trained workforce.
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Conclusion
Sales revenue is one of the most valuable metrics for analysing past performance and historical financial forecasting. This is why its position at the top of an income statement is so significant. Other metrics listed are frequently expressed as a percentage of this key figure. Therefore, it provides an optimal reference point for predicting any other metric on the income statement.
The bottom line is that businesses exist to make a profit. A major part of the profit-making process is identifying and analysing money as it comes in. Finally, understanding sales revenue is a crucial part of that process.
FAQ
Sales revenue is income from products and services before any expenses are deducted. It is usually calculated over a defined period, such as a financial year or quarter.
No costs or expenses associated with business operations are deducted from sales revenue. Profit is the income remaining after all expenses, debts, other income streams, and operational costs are accounted for.
Operating income looks at profit after deducting operating expenses such as wages, depreciation, and cost of goods sold.
Four common types of revenue are: revenue from sales of goods or services, interest revenue earned on investments, rent revenue from letting buildings or equipment, dividend revenue earned from holding stocks and shares of other companies.
Direct sales revenue is the portion of sales revenue paid directly from the customer to you. This is contrasted with indirect sales revenue, which is paid from a customer to a third party to you.