Is net revenue the best measure of business success?

It’s almost impossible to track the success of a business without accurately tracking its sales and revenue. But while sales is quite a straightforward thing to measure, revenue is a little more complex. For starters, you have the questions of gross revenue vs net revenue and revenue vs income and that’s before we take into account all of the other potential financial variables.

Of course, these are all terms and processes that will be intimately familiar to an accountant. But if you run a small business and don’t wish to hire an accountant or simply want to gain some insight into the differences between the types of revenue, here’s a surface-level dive into net revenue.

What is net revenue?

While gross revenue takes into account the total revenue of a business, net revenue is a more accurate reflection of a business’s financial success. This is because it removes all of the directly related selling expenses from the gross revenue. It’s often called the “real top line” and computes what’s left after the cost of goods sold and other costs directly related to the sale are subtracted from the total. Other indirect costs like rent and wages are then detracted from the net revenue. 

Net revenue vs net income

All income statements start with the total amount that a business has made in a given period. Net income is what’s leftover at the very end of the statement after all bills have been paid and expenses such as the cost of goods, depreciation, and general selling and administrative costs have been deducted. It is, essentially, what the business gets to “take home”. The net revenue, meanwhile, accounts for discounts, returns and employee sales commissions.

An example of net revenue

If a company sells 2,000 copies of a product for £10 then the gross revenue will be £20,000. However, if out of those 2,000 copies, 100 of them were returned, you would need to deduct £1,000 from that total. That leaves you with net revenue of £19,000

Now let’s say the business offers a special discount code to certain customers, which allows them a £2 discount on their purchase. Of the 2,000 people who order the product, 200 of them use this code. Now, you need to deduct a further £400 from the gross revenue (£2 x 200) to give you a final net revenue of £18,600.

Why is net revenue important?

There is a reason why so many businesses choose to use net revenue as a baseline for reporting to potential investors – it’s a far more accurate reflection of how much money they are actually making. Indeed, while it is rare for net revenue to be negative, if a company was offering wild discounts and experiencing hundreds of returns, it’s perfectly possible to experience a negative net revenue at one point. A negative gross revenue, meanwhile, would be impossible.

Of course, in some situations, an investor might be more interested in pure sales figures, in which case they would want to examine your gross revenue. But as an internal resource, net revenue is far more valuable as it allows businesses to make decisions on where to make cuts and where to make investments.

It’s not a metric that should be taken alone as a catalyst for making major business decisions, but it’s not one to ignore either. When taken alongside profits and other financial metrics, net revenue is a tool that can be used to take your business to the next level. 

We can help

If you’re interested in learning more about net revenue, or any other aspect of your business finances, then get in touch with our financial expert. Visit our website to find out how GoCardless can help you with ad hoc payments or recurring payments.