Revenue is the total income that a company generates from its business activities. This can come from a variety of sources, including sales of products or services, interest on loans, and investment income. Revenue is an important metric for businesses, as it serves as a key indicator of financial performance.
High revenue can be a sign of a healthy business, while low revenue can be a warning sign of trouble. For this reason, analysts and investors often closely track a company’s revenue growth (or lack thereof). Businesses typically aim to grow their revenue year over year in order to stay ahead of inflation and maintain a healthy bottom line.
There are certain things you must understand before you can fully come to terms with your business finances, one of which is revenue. The revenue your business brings in will help to measure your cash flow and is the very material that carves out your profit margins.
So, what is and is not categorised as business revenue? How does revenue differ from turnover, given that the two terms are often mistaken for one another? How should you calculate revenue in your accounting? We aim to answer all those questions for you today.
We shall now study the largest building block of your business finances in greater amounts of detail.
Understanding revenue
To put it simply, revenue is key to keeping a business afloat and will indicate how successfully you are making money. Revenue is the income generated through regular business operations, such as sales. This is the money that comes into your business due to your company doing what it does.
You generate revenue by selling your products or services, so the more you sell, the higher your revenue will become. You will find revenue to normally be the first line on your income statements and will be commonly labelled as either sales or service revenues. This is the cash that is injected into your business venture before any operational costs are deducted.
Is turnover the same as revenue?
You may have found these two terms to be used interchangeably in the past. This is because they normally end up meaning the same thing, but they are not 100% similar. But what is turnover? , occasionally, turnover can refer to something slightly different.
If your business operates in the financial services sector, and sometimes generates cash from investment capital, that will not be recognised as turnover in the eyes of HMRC.
Accrued and deferred revenue
Revenue can be divided up into two separate types. These are known as accrued and deferred revenue.
Accrued revenue is the income that a business procures for services and products that have been conveyed but not yet paid for by the client. In the accrual method of accounting, revenue is accounted for at the hour of the exchange and not really when the assets have been gotten.
Deferred revenue is the exact opposite. Here, the organisation gets payment ahead of time from the client for products and services that presently can’t seem to be conveyed. The assets are accounted for as a responsibility until the goods or services are received to the customer’s satisfaction. This can assist with forestalling income issues by keeping the business from going through cash not yet actually accessible to it.
How to calculate revenue
The easiest and perhaps most common way to calculate revenue, is to take the number of product units sold by your business venture and multiply them with the average product price. If you own a service-based business, you can work out your revenue by multiplying the number of customers or contracts by the average service price.
You can also forecast revenue by weighing up factors such as:
- Overall website traffic
- Sales leads generation
- Conversion rates
- Product prices and discounts
- Number of returns and refunds
Revenue and net income: the top and bottom line
These two things are often referred to as the top and bottom line, due to where they appear on financial statements. Revenue is usually the first thing you’ll see, and net income is often the last. You should take net income as much more accurate representation of your company’s financial health, even though your revenue figure will often appear far more reassuring.
Your net income is what you are left with after the expenses have been subtracted from your revenue total. Therefore, it is a far more trustable figure in regard to the financial status of your small business venture.
These expenses may include:
- The wholesale cost of any products or services you sell
- The cost of materials used to develop your products
- Human resource costs, including wages, etc.
- Operational costs such as rent, energy, telecoms, etc.
Examples of revenue
There are many ways to generate revenue as a business. Some of the possible ways are as follows:
- The sale of goods or services to customers
- Accepting pre-orders from customers on items that have not yet been released
- Subscription fees paid by customers for services you offer to them
- Income earned by professional services, including solicitors, accountants, or consultants
- Income from warranties, servicing, or aftercare for machinery and equipment
How we can help you
Here at Invoice Funding, we can provide you with a wide range of finance solutions that will help to propel your company forward or simply give it a hand when the going gets tough. Get in touch with a member of our expert team today and discuss what options would be best suited to your business venture.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.