Last editedMay 20222 min read
There’s a time and place for in-depth financial analysis. However, when you need a simple assessment of a business’s performance, sales revenue is a go-to metric to track. It offers a quick overview of how much profit a business is taken in without the complication of additional factors like expenses and commissions. Here’s a closer look at how sales revenue is calculated, and why it’s important to investors.
Sales revenue explained
Sales revenue refers to any revenue earned by a business solely from selling its goods and services. It doesn’t take passive revenue streams into account, such as investment earnings. Sales revenue is calculated and recorded by a business on its income statement, tallying up any revenue earned from sales for a specific accounting period.
While sales and revenue are often used interchangeably, there’s a fundamental difference between the two:
Sales includes earnings from the sale of goods or services.
Revenue includes earnings from the sale of goods or services as well as passive income from interest and investments.
In a nutshell, while all sales are revenue, not all revenue will be sales. Total revenue will usually be higher than sales revenue because it takes multiple sources of earnings into account.
What is net sales revenue?
Another term you might see referenced on the income statement is net sales or income – so what is net sales revenue and how does it apply in this situation? To calculate net sales revenue, you must take your total sales revenue for the accounting period in question and then subtract a few additional items:
Total sales revenue doesn’t take these into account. For example, if a customer returns a purchased item for $100, you will subtract this $100 from the total sales revenue to calculate net sales revenue. Sales allowances are any credits given to customers, while sales discounts are reductions on price offered to customers making purchases on credit.
Why is sales revenue important?
Understanding sales revenue is useful for business owners and investors alike. It shows how much a business is earning during the accounting period in question, without taking other factors into account. This enables a useful side-by-side comparison so that investors can see at a glance how the business is performing from one period to the next.
Sales revenue provides an overview of profit and earnings, but this figure can also be broken down into smaller metrics or input into a common-sized income statement for deeper analysis. For example, you can deduct returns, discounts, and commissions to look at net sales revenue. You can also break it down into gross sales, or the total sales for the period.
Whether looking at sales revenue alone or breaking it down into smaller metrics, the data can be used by business owners to make savvier decisions. Knowing how much your business is taking in each quarter allows you to plan your operating expenses, analyse sales trends over time, and determine new strategies for growth.
How to calculate sales revenue for the income statement
Calculating sales revenue couldn’t be easier. The first step is to choose your accounting period and find the accompanying receipts, along with a quarterly or annual sales report. Next, you must multiply the number of units sold by the product’s average price. For service-based companies, you must multiply the number of customers by the average service price.
Have you ever heard investors refer to a business’s ‘top-line growth’? This refers to its revenue, and sales revenue is recorded at the top of the income statement accordingly. An easy way to do this is to break down the revenue section into ‘sales revenue’ and ‘other revenue’ lines in an itemised list, distinguishing between sales earnings and other revenue streams.
Ultimately, sales revenue is an important metric to record and track. It’s not only useful for understanding business health, but also for making important financial decisions.
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