If you have been wondering what gross revenue is, you’re at the right place. We will reveal the definition of it and outline all the important details that can be valuable to aspiring entrepreneurs.
Key Takeaways
- Gross revenue is money that a business has accumulated by charging the customers or the clients for the services or products.
- Gross revenue is also known as gross income, so entrepreneurs must be aware that these two business terms have the completely same meaning.
- Gross income calculation doesn’t include business expenses; it only refers to the money that a business entity has earned from the sale of goods and services.
- By tracking the amount of gross income on a monthly or quarterly basis, companies can get to know if their business sales volume is on an upward or downward trajectory.
What is Gross Revenue?
Gross revenue is the amount of money the company has made in a given period, usually a year. When calculating it, entrepreneurs can include money earned from sales, interest, currency exchange rates, sales of shares, or renting equipment or property.
This type of revenue is also known as gross income or the top line; this is due to the fact that in a company’s income statement, this type of earning is placed at the top.
When a company makes a calculation about gross income, the money spent on the cost of products or any other operating costs isn’t included in it. This type of revenue refers only to the money flowing into the business at a given time.
Why Businesses Need to Track Their Gross Income
Businesses must track how much they make in gross income every month because this gives insights is the company’s sales volume is on an upward or downward trajectory.
Also, tracking sales volume can show if there are any problems in the field, so company managers can make necessary changes on time to hit sales goals for a given time period.
The gross revenue helps a company to make data-driven decisions that will be reflected in the business profit at the end of the fiscal year. By collecting these data, managers can aid in deriving other important financial metrics.
Metrics like net revenue and net profit can be derived from gross income. Additionally, it is an important metric for potential investors to decide if they want to invest or not because it represents the strength of a company to future investors.
How to Calculate a Company’s Gross Revenue
Determine a time period.
As mentioned above, the gross revenue is calculated for a given period of time. The time period that’s usually chosen is a year, but it can also be monthly, quarterly, or any selected time period.
Identify sources of income.
Income sources can be sales, interest, subscriptions, currency exchange rates, sales of shares, equipment, or property. Make sure the sources of income are acceptable to the GAAP standards.
Add up the aforementioned income.
Add up all the incomes identified in the step above. The total is the gross revenue of the company.
What Affects Gross Revenue
The number of units sold.
This is an obvious one, but the amount of sales made by a company impacts gross income. The higher the sales, the higher the earnings will be.
The price of a single unit sold
It’s important to keep the price in a range that satisfies customers. But even a slight price increase can bring a large amount of revenue to a company. This helps in increasing the gross revenue.
The renting assets of the company
This type of revenue can also be acquired by renting out a company’s property or equipment. Investing in equipment and property the company can rent out may increase gross revenue.
Gross Revenue Examples
Example 1
Let’s say a startup perfume company has three products for sale. Item A, item B, and item C.
They’re priced at US$ 150, US$ 120, and US$ 50, respectively. Let’s say the company sold 46 units of A, 36 units of B, and 74 units of C in a month.
The gross income for that particular month is as follows.
= Income due to item A sales + Income due to item B sales + Income due to item C sales
= (US$ 150 x 46) + (US$ 120 x 36) + (US$ 50 x 74)
= US$ 14,920.
The gross income of the perfume company in the considered month is US$ 14,920.
This gives company managers valuable information because they can make decisions on its pricing based on this data. To increase the gross revenue, the company can make meaningful changes. For example, increase the prices of perfumes in high demand.
Example 2
Let’s say a company has only two clients who have signed contracts for services worth US$ 24,000 over two years.
The gross revenue per month this company will calculate like this:
= US$ 24,000 / 24 months x 2 clients
= US$ 2000
Example 3
A company has made US$ 30,000 in sales, US$ 5000 renting out their property, US$ 3000 renting out their equipment, and US$ 20,000 from selling shares in a year.
The gross income of this company in that year is:
= US$ 30,000 + US$ 5000 + US$ 3000 + US$ 20,000
= US$ 58,000
The company can increase the interest of potential investors by showcasing this information. The company can aim to further increase its gross income to impress prospective investors.
Example 4
A video streaming service sells a subscription for US$ 20 per month. On the first month of interest, 20,000 people paid their monthly subscription.
In the second month, 5000 additional subscribers paid the subscription fee.
In the third month, another 3000 subscribers paid the monthly subscription fee.
This is how the company will calculate gross revenue for those three months:
= (US$ 20 x 20,000) + (US$ 20 x (20,000 + 5000)) + (US$ 20 x (20,000 + 5000 + 3000))
= US$ 1,460,000
The video streaming company can make informed decisions based on this information.
As we can see from their revenue, the number of new subscribers is plummeting. The company can consider changing the price of subscriptions. Or they can consider introducing new subscriptions with lower prices.
Gross Sales vs. Gross Revenue
The gross revenue is the addition of all income methods of a company, so in it are included all sales. But all revenue isn’t derived from sales; therefore, gross sales are just a part of gross revenue.
Gross Revenue vs. Net Revenue
Net revenue is derived from the gross revenue. To receive net revenue, a company has to reduce any discounts given to customers, refunds given, and commissions given to employees from the gross revenue.
Net revenue doesn’t count for unrelated expenses like rent, utility costs, or other bills. Net revenue only concerns sales-related expenses.
Gross Revenue vs. Gross Profit
Gross income is the total earnings that a company has made in a particular time period. Gross profit is the value obtained when the cost of production is reduced from the gross revenue.
Costs like rent and other bills aren’t reduced from the gross income to calculate the gross profit. Gross profit only concerns the money that relates to the production and sales of products.
Summary
Every business must track its sales volume because that is the most important metric in any company’s financial statements. By getting known on time that sales have been drop, the manager or the business owner can find what caused that problem and find a quick solution to it.
