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Understanding Revenue: Definition, Formula & Examples

To better understand your business finances, you must first understand your revenue. Revenue is the raw material from which your profit margins are carved, and your cash flow is measured. But what is and is not classed as business revenue? How does revenue differ from turnover, given that the two terms are so often used interchangeably? And how do we calculate revenue in our accounting? 

Join us as we explore this fundamental building block of your business finances. 

What is revenue?

Just so we’re all on the same page, let’s clarify what we mean when we talk about revenue. Simply put, revenue is the money that comes into the company because of your business doing what it does. You generate it by selling your products or delivering your services. Revenue is typically the first line on your income statement and is commonly referred to as sales or service revenues. It’s also called “gross sales” or “gross income”. It’s the money that comes into your business before your operational costs are deducted.

Is turnover the same as revenue?

Many businesses use the terms revenue and turnover interchangeably. That’s not necessarily inaccurate since they often end up being the same thing. However, sometimes businesses' revenues don’t come from delivering goods and services. For instance, companies in the financial services sector will generate income from investment capital that, in the eyes of HMRC, is not seen as turnover.  

Accrued and deferred revenue

Revenue is broadly divided into two types. These are called accrued and deferred revenue. 

Accrued revenue is the revenue that a business earns for goods or services that have been delivered but not yet paid for by the customer. In the accrual method of accounting, revenue is reported at the time of the transaction and not necessarily when the funds have been received. 

Deferred / unearned revenue is just the opposite. Here, the company receives payment in advance from the customer for goods or services that have yet to be delivered. The funds are reported as a liability until the goods or services are received to the customer’s satisfaction. This can help prevent cash flow problems by preventing the company from spending money not yet technically available to it.

Calculating revenue

Revenue is usually calculated by multiplying the number of product units sold by the average product price. For service-based businesses, revenue is calculated by multiplying the number of customers or contracts by the average price of services. 

Revenues can also be forecast by weighing several factors including:

  • Website traffic and sales leads generated

  • Conversion rates

  • Product prices and discounts

  • Return and refund rates

Revenue and Net Income: The top and bottom line

Revenue is the first thing recorded on your income statement, while net income is usually the last. Hence, these two are often called the top and bottom line. While revenue can often be a reassuring figure, it can also be misleading. Your net income is a much more reliable indicator of your company’s financial health. 

Your net income is what’s left of your revenue after your expenses for the period have been deducted. These may include:

  • The wholesale cost of the goods you sell

  • The cost of the raw materials from which your products are made

  • The cost of human resources (wages, fringe benefits etc) 

  • Other operational costs like rent, energy, plant, telecoms etc

Revenue examples

There are several ways a business can generate revenue. These may include:

  • Income from product units sold

  • Income from warranties, servicing or aftercare for vehicles and machinery

  • Pre-orders from customers for products that have not yet launched

  • Subscription fees paid by subscribers for magazines or digital content / services 

  • Fees earned by professional services like solicitors, accountants or consultants

We can help

If you’re interested in discovering more about revenue, net income, or any aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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