June 13, 2022
If you’re new to the world of Accounting, you’ve probably been bombarded with all kinds of terms that sound confusing. Chances are, one of those terms is Gross Revenue. It’s one of the most important figures in business and gives you a good idea of how well your sales teams are doing.
Gross Revenue is sometimes called Turnover or just Revenue. Let’s take a closer look at Gross Revenue, meaning, what it can tell you about your business, and how to calculate it.
Gross Revenue simply means the total value of all the sales you have made during a particular period.
You can calculate Revenue on a daily basis, monthly, quarterly or annually. Some businesses, particularly retail and fast-moving consumer goods companies, monitor their Revenue very closely, while others who have longer sales cycles may focus on weekly or monthly figures.
When it comes to Gross Revenue vs Net Revenue (sales), there isn’t one that’s better than the other. They both provide valuable information that you can use for business planning purposes.
Gross Revenue gives you a good idea of how your sales team is performing. Provided you have enough Profit built into every sale; this is a good indicator of how well your business is doing. Ideally, you want your Gross Revenue to increase over time, which tells you that your sales are increasing, and your company is growing.
Net Revenue is calculated by deducting any discounts or allowances from Gross Revenue, as well as the cost of sales and other expenses. So this figure is what you would keep in your bank account after all your expenses and costs are paid. This figure also provides valuable information. If your Net Revenue is very low, then there might be a problem with your pricing, or you might need to cut costs or increase production.
Another important reason to understand the difference between Gross Revenue vs Net Revenue and how to calculate both net and Gross Revenue is that you will be taxed on net income.
Any money that you have to pay to employees, suppliers or service providers in order to conduct business will become part of their income or Revenue, and they will pay tax on that money.
Expenses are also known as tax deductions, and when you calculate your business tax, you will deduct those amounts before you calculate how much tax you owe.
If you use accounting software like QuickBooks, your Gross Revenue will already be recorded in your Profit and Loss reports as soon as it is entered into the system. You can generate a P&L report (also know as Income Statement) with LiveFlow and track your Gross Revenue (Income) changes in real time.
This is why it’s so important to make sure you enter all your orders and invoices as soon as possible so that they can be captured for the correct period and your sales data will be as accurate as possible.
If you use a tool like LiveFlow, which has a Google Sheets add-on, you can also synch these figures, so you can create spreadsheet-based reports that show you everything you need to know at a glance.
How to calculate Gross Revenue is probably one of the easiest things to answer in the Accounting world. This figure is simply the total of all sales you have made during a specific period.
Let’s say you measure Revenue every month.
You make four sales for the month. One is $10,000, one is $20,000, one is $15,000 and one is $25,000.
For that month, your Gross Revenue would be $70,000.
You don’t need to add or deduct anything else to calculate Gross Revenue. Just add up your sales, and you will have the figure.
Many people get confused about the difference between Revenue and Profit, and they wonder whether Gross Revenue also means Profit. That’s not the case.
Gross Revenue is the total value of sales before you deduct anything from it.
Profit is the amount of money you have made from sales. So you need to deduct the cost of goods sold and other costs like operating costs and overheads. So Profit is the amount of money you have left in the bank after covering all the costs associated with earning the Revenue.
Now that you know what is Gross Revenue and how to calculate Gross Revenue, you might be wondering if it’s even worth tracking this number since it won’t tell you how much Profit you are making.
However, that’s not entirely true.
Once you have been in business for a while, you will have historical information about how much Profit you have made over time. Let’s assume, for instance, that you know that your net Profit is typically between 15 and 20% of your Revenue.
Even without calculating your exact Profit for a particular period, you will therefore have a good idea of what your Profit will be. So, for instance, if you have made $100,000, you can expect to make a Profit of between $15,000 and $20,000.
Most businesses also know how much Gross Revenue they need to make during a particular period to cover their average costs. Once you know that amount, you can work the whole equation backwards, so you always know exactly how much you need to make during a particular period to stay afloat. If your Gross Revenue drops below that amount, it immediately signals that something is very wrong!
Gross Revenue doesn’t tell you the whole story, but it’s one of the earliest figures you have to work with in the accounting process. So it definitely still has value for planning and business management.