Revenue

Revenue is the amount of money, which a firm or a corporation receives through conducting business operations. It has its own formula, any company may estimate it by multiplying the average sales price by the number of units sold. It’s also regarded as a top line, it’s used to define the amount of net income. The top line is also known as gross income. In preparing an income statement, the word revenue is replaced with sales.

Accounting methods and Revenue

The amount of money that a company generates via actively carrying out business activities is known as revenue. There is no the only and universal approach for calculating revenue, on the contrary, the accounting world is familiar with two different methods. The choosing of a method totally depends on the company.

Accrual accounting. There is an accounting method which is called accrual accounting, the method may regard credits as revenue as well. Also, in some cases, the method allows adding to the total revenue money for services that wasn’t actually paid. Thus, revenue may seem bigger than it actually is.

Cash accounting. The second accounting method is known as cash accounting. This method allows adding only money that was actually paid for the provided service. The word cash isn’t used, instead it's called a "receipt." The interesting fact is that a company may have a receipt and may not have revenue. There are situations when a customer has already paid for a service, thus, a receipt has appeared. However, it doesn’t mean that it counts for revenue.

The best way to figure out whether an organization handles to collect the money it must have with high efficiency or not is to look at the cash flow statement.

Revenue and profit

Revenue is sometimes called the top line for the reason it makes its first appearance on a special record, which is known as a company's income statement. There is another concept that must be known, it’s net income. To calculate net income, you need to deduct expenses from revenue. The result of this example is called profit. Profit may be either positive or negative. Positive profit means that revenues are bigger than expenses. Negative profit means that expenses exceed revenues and refers to the business losses.

Profit is an important thing not only for a company, but for its shareholders as well. Thus, companies do their best seeking for the most efficient strategy in order to increase profit. By increasing profit, companies also are increasing earnings per share (EPS). One of the best strategies is to increase revenue or reduce expenses. The better one is to increase revenue and reduce expenses. It may lead to the greatest results.

In order to figure out whether a business is successful and doing well, investors separate revenue and net income. Considering it in such a way provides a clearer picture. For example, there are situations in which revenue is the same, but net income is growing. It happens due to cost-cutting.

However, it may affect the company’s development not in a good way. In this case long-term growth will be affected. Every quarter companies report their earnings, the investors’ attention more often is paid to revenues and earnings per share. In case results meet everyone's expectations, a stock's price may grow, otherwise, it may dramatically fall.

Difference between Revenue and profit

Both conceptions have to do with money that a company earns, the difference is in the subtleties. A business regards all earned money as revenue. Thus, it may be called gross proceeds, while profit is about other aspects involved in business. It’s expenses, which include cost of goods that were sold, expenses made in order to provide a decent operating, interest expenses, etc.

Types of Revenue

Companies may create their own classification of revenue. For instance, a company, which is specialized in different types of vehicles, may divide revenue in such vehicle’s classes. IT-companies may divide it by the products they produce. However, generally, revenue is divided into two categories.

Operating revenue. This kind of revenue a company received conducting its main operations, in other words, a company’s core business. The company isn’t obligated to receive all revenue from this. However, the biggest part should be received through it. The core is different for each company and is defined by the company's specialty. For example, it may be sales, renting, consulting services, etc.

Non-operating revenue. This category is for revenues from sources that aren’t regarded as the main sources for a company. They are usually described as secondary sources. This revenue includes non-recurring or unpredictable transactions. For instance, it may be interest revenue or sale of assets or equipment.

How to calculate Revenue

The formula for calculating revenue that would satisfy every company all over the world doesn’t exist. Each company makes its own formula considering its specialty, industry it works in and sector. However, there is a general formula that can be used in order to calculate net revenue. It’s presented below:

The most essential element of the formula is the quantity sold times the price. For different companies, these elements vary. For instance, a company that provides people with different kinds of services will multiply the number of service hours by the billable service rate. A retailer will multiply the quantity of goods that have been sold by the calculating moment by the price of sales.

The difficult part is that some companies don’t sell only one product. For instance, Samsung has a great variety of goods, the corporation may sell mobile phones, televisors, memory chips, laptops, etc. Thus, the formula can’t be used once to calculate the net revenue, the result wouldn’t be right. Each product requires a separate calculation. Then the separate results may be added to each other and only this way an accurate total revenue may be calculated.

However, there are some factors that lessen revenue. For example, it may be discounts on the price that is the official price for selling, allowances awarded to customers, or products that a customer decides to return. All the mentioned things must be deducted from the total amount according to accounting guidelines. The thing you should remember is that deduction of discounts may take place only in case previously the formula used a product market price for calculating.