Mark V. Hurd, former CEO of Hewlett-Packard and Oracle, once said, “I know only a few ways to take market share and drive new revenue. I can engineer better products and services, I can build better relationships with my customers and deliver a higher level of service, or I can give my customers a lower price.”
When you run a business, revenue is the fuel that keeps it going. Without it, much like anything with an engine, you won’t be going very far. In order to stay in business and keep moving forward, you have to keep bringing in revenue. How to find revenue is the key.
There are as many ways to create revenue as there are business ideas. Like Mark Hurd pointed out, better products/services, better relationships, and tinkering with prices are the basic ways to get revenue in the door…regardless of what you sell.
To know how much revenue you need to bring in, you first need to know how much you already have. In order to do that, you need to know how to find revenue in your financial statements.
What is Revenue?
Before you can locate revenue in your financials or understand how to use that information to grow your business, it’s important to understand exactly what it is.
While it may seem like a simple question with an obvious answer, revenue can get fairly complicated…especially as your company gets bigger and bigger.
At its most basic level, revenue is simply the number of sales multiplied by the average sale price. But it’s important to distinguish between gross (or total) revenue and net revenue.
Gross Revenue
Gross (or total) revenue is the sum of every bit of income your business brings in, regardless of the source. This would include sales, donations (if your business is a nonprofit), marketing, and investments. If you have multiple product/service lines, and therefore multiple streams of income, you would lump all of those together in order to calculate gross revenue.
The formula for gross revenue is: TR = P x Q (Total Revenue = Price x Quantity Sold).
Knowing what your gross revenue is lets you have a quick “30,000 foot view” of your income. You are able to see at a glance how customers are interacting with your business. It can also help interested third parties better understand the health of your business at a glance. As Indeed.com points out in their article “How to Calculate Total Revenue”, “…your company’s gross revenue can help investors and lenders to more accurately see your ability to turn a profit. The greater your total revenue, the greater your chances are of qualifying for a loan or gaining an investor.”
However, total revenue doesn’t give you any idea of how much money your business is retaining after expenses. For that, you need to look at net revenue.
Net Revenue
Net revenue (also known as “Net Profit”) is one of the easiest figures to find on your income statement. It’s the number at the very bottom. (Which is why it is often called the “bottom line.”)
It takes into account the “cost of goods sold” (COGS) related to your products or services. Therefore, it gives you a more realistic view of how much revenue your business actually gets to keep.
Its formula is: P = TR -TE (Profit/Net Revenue = Total Revenue – Total Expenses).
How to Find Revenue in Your Financial Statements
Like we just mentioned above, locating net revenue is as easy as looking at the bottom line of your income statement. However, not all revenue is the same. And not all revenue shows in that one place.
To learn how to find revenue accurately so that you can effectively stay on top of your company’s finances, let’s take a look at a few of the various types of revenue you are going to encounter.
- Sales Revenue – As the name implies, this is the income generated by the products you sell or the services you provide. On your income statement, these are typically broken down individually. Therefore, you can see how each product/service line compares to the others and to itself over time. There are a couple of ways to record sales revenue, and the difference is important:
- Recognized Revenue – You can claim all of the money from the sale as revenue right away. (You sell a widget, the customer pays you the full price, they leave with the widget, and you record the sale.)
- Deferred Revenue – The sale has been made, but the customer has not paid the full amount yet. Therefore, you can only claim as revenue the money that has actually been given to you. (Your landscape company sells an annual package, payable monthly. You can only record the money paid as revenue for any particular month. The outstanding amount remains a liability until the end of the year when the customer has paid in full.)
- Subscription Fees – Money generated when someone signs up for ongoing access to a product or service you offer. (Magazine, Netflix, club membership, etc.)
- Rental/Leasing – Revenue from a flat rate your customers pay to use a product or service for a specified period of time. (AirBnB, car rental, office space, etc.)
- Licensing – Money paid in order for someone to use something you retain the copyright to. (Photography, an athlete’s name, image, and likeness, etc.)
- Brokerage – Income you earn as a “go-between” for other parties. (Real estate agent)
- Advertising – Income paid to you in return for someone being able to advertise their products/services on property you own. (Ads on your website, stickers on your NASCAR, etc.)
How to Use Revenue Data to Grow Your Business
Now that you know how to find revenue, let’s help you discover how to make more of it!
When you understand where your revenue is coming from, you can focus your energy on improving those channels to increase it. If the numbers reveal that you have a problem in one or more areas of revenue, you can likewise take emergency actions to keep from losing any more. Either way, it’s knowing your numbers that allows you to be able to take advantage of them.
Understanding your revenue allows you to:
- Adjust your prices appropriately. If a particular area of your business is losing revenue, you may want to have a sale to incentivize customers to buy. If another area has a lot of demand beyond what you can supply, you may need to raise your prices to be able to keep delivering excellent results there.
- Understand your customer behavior better. By looking at revenue trends across the various income streams of your business over time, you can see how your customers are interacting with your company. Steady growth can confirm that you’re doing something right, while a slump in sales in a particular area is a good reason to investigate further to find out why.
- Make plans for how to spend your money. When you’re looking to spend money expanding your business, the opportunities can be endless. You’ve worked too hard to get this far. It would be a shame to mess it up by spending foolishly. By appropriately analysing revenue trends, you’ll have a good idea of what parts of your business you should invest in.
- Grow strategically. As your business grows, you deserve for it to not be a waste of time and money. When it comes time to make capital improvements, buy new equipment, or explore new areas of opportunity, understanding your revenue lets you know what the wise choices are.
To Really Grow, Partner with a Pro
CRS CPA understands how important a strong and dependable revenue stream is to your business. We’ve helped business owners just like you calculate and maximize their revenue for over 40 years now!
One of the best services we offer to help you do that is our CFO Consulting. When you partner with one of our accounting professionals, we guide you through a simple but effective plan that results in you making (and keeping!) more money.
- We meet with you to learn the ins and outs of your business.
- We put together a plan tailored to your needs, including areas like:
- Part-time CFO services
- Cash flow management
- Bank financing
- Strategic Business Planning
- Succession Planning
- New Business Formation
- Internal Controls
- You get to focus on doing work that impacts the lives of your family, your employees, and your customers.
Schedule a call today to find out how we can help you improve revenue and make your business even stronger!
