Sometimes, the simplest metric can provide the most information. In the case of sales revenue, it’s perhaps the quickest way to judge a business’s performance in a given period. It’s often highly sought after by investors as it is a reflection of how much a business is selling without the complications of discounts, employee commissions, returns, or other expenses like salaries and product costs to consider.
What is sales revenue?
Any revenue earned from selling goods and services during a set accounting period (generally a quarter or a year) can be referred to as sales revenue. Indeed, the terms sales and revenue are often used on an interchangeable basis by a lot of businesses.
There are important distinctions, though. Sales is just a part of what the company earns (from the sale of goods and services), whereas revenue refers to the company’s total income, which might include passive earnings from interest or investments. As a general rule, “sales is revenue, but not all revenue comes from sales”.
How to calculate sales revenue
To calculate sales revenue, simply multiply the number of units sold by the average price of that product. If you are a service-based business, multiple the number of customers by the average price of the service.
Why is sales revenue important
Analysts and investors generally use sales revenue to estimate the size of a business. It can also break down into two other metrics that can be used to make other investment and managerial decisions. This includes gross sales, the total sales made in that period, and net sales revenue, which deducts the returns, discounts, commissions, and allowances.
Sales revenue data can be used to determine which actions to pursue and which to avoid. It can be used to help shape the direction of a business in the following ways:
Planning operating expenses – This includes everything from employee salaries to supplies and inventory.
Growth strategies – Your sales revenue will help you decide how much you have to invest in research and development, general upgrades and other growth investments.
Trend analysis – When analysed over time, revenue peaks and troughs can be used to identify customer patterns and make adjustments around them.
Pricing strategy – Are you charging too much or not enough? Sales revenue is perhaps the most important and obvious consideration when making this incredibly important decision.
The top line
Revenue is called the top line as it is often the first figure included at the top of an income statement. So, if you’ve ever heard a business talking about its top-line growth, they’re referring to their revenue or gross sales.
Generally speaking, if a business’s revenue is smaller than its sales, it might be in trouble. However, there are exceptions to this rule, such as if a company is going through a period of heavy discounts like a Black Friday sale.
Sales revenue on your income statement
The sales revenue is located at the top of an income statement for several reasons. Firstly, it’s the ideal place for any business to start from, as everything else below it will invariably be a deduction. Also, we are naturally inclined to read things in a top-down fashion, making it easier to make business forecasts and decisions. Expenses located below sales revenue are often expressed as a percentage of that revenue, so think of the sales revenue as the anchor or the litmus test for all other metrics.
We can help
If you’re interested in learning more about sales revenue, or any other aspect of business finance, then get in touch with our financial experts at GoCardless today. Find out how GoCardless can help you with ad hoc payments or recurring payments.