Business owners would do well to understand the intricacies of their business finances, including cash flow, profit, loss, and revenue. If you’re not fully sure how to measure your company’s revenue, this article will help.
What is Annual Revenue?
Your company’s annual revenue, or annual sales, is the total amount of money it earns over a year. You might measure that year as a calendar or fiscal year, depending on how you do your accounting.
Revenue does not take expenses into account, and it is different from profit.
Revenue vs. Net Income
You may hear the terms “revenue” and “net income” and think they can be used interchangeably, but they cannot.
Gross revenue includes all the money you make from sales. Net revenue is that number minus any fees you had or discounts you gave in the sale of the products
Net income is what’s left after you subtract from net revenue the cost of goods sold, operating costs, and any fixed and variable expenses that go into producing a product. In financial reporting, you’ll see these numbers on your income statement.
Why is Annual Revenue Important for Small Businesses?
Knowing your annual revenue is essential to your business for many reasons. First, comparing this year’s revenues to last year’s can help you see if you did better or worse comparatively. This comparison metric can help you make decisions about your sales strategy, such as increasing sales prices if revenues are down.
And if you plan to apply for small business loans now or down the road, you’ll need to know your annual revenue numbers since lenders use that as an indicator of how likely you are to be able to repay a loan.
How to Calculate Annual Revenue
To calculate your total annual revenue, simply look at the sales of goods over a year. If you don’t have this number, you can look at how many products you sold in a year and multiply that number times what you charged for those products. This will give you your gross sales revenue.
Here’s an example to help you learn to calculate annual revenue. Let’s say you sell candles at $10 a piece. Last year, you sold 30,000 candles. To find your gross revenue for last year, you’d multiply candles sold by their price:
30,000 x 10 = $300,000
If you want to calculate your net sales, subtract your cost of goods sold and any discounts you gave. Let’s say you had $75,000 in discounts and cost of goods sold. That means your net revenue is:
300,000 – 75,000 = $225,000
If you use accounting software, you can see your annual revenue (or monthly, if that’s what you’re looking for) in your profit and loss statement, as well as other financial statements.
Types of Revenue
There are two types of revenue (or income): operating and non-operating revenue.
Selling products or services is considered operating income. It’s the primary thing you sell, whether that’s candles, cars, or consulting.
There are also several types of non-operating income you might have. If you sell assets, you would generate revenue from that sale. Depending on your revenue streams, you might see revenues from the interest you earn on debt securities (in the event that you loaned money to another entity, which pays back the loan and interest).
You might also receive rental revenue if you own property that you rent out. And if you hold stocks in other companies, you might also receive dividends as a form of revenue. These are all considered non-operating income.
How to Report Revenue on Applications for Financing
I mentioned that you need to know your annual revenue if you’re applying for small business loans. That may also be the case if you’re applying for business credit cards, commercial real estate loans, or lines of credit.
Each lender will have different requirements. You may be asked to provide detailed financial statements (particularly if you’re applying for a bank or SBA loan), or you may simply need to input your revenue numbers into the application.
Some lenders may require you to make a certain amount of revenue to qualify for a loan.
Understanding your business revenue can help you be a savvier business owner. Measuring revenue growth (or loss) can be helpful in building a long-term financial plan for your business. You might decide to expand into other products, raise prices, or retire a product line, based on what your revenue numbers tell you.