Calculating Annual Business Revenue 101: Why Is It Important?

Calculating Annual Business Revenue 101: Why Is It Important?

Calculating Annual Business Revenue 101: Why Is It Important?

“How much money do you make?” That would be a rude question if asked by a stranger, or even a friend. But if you are a business owner seeking financing or money from investors, you’ll encounter that question all the time, and you better be prepared to answer it. 

Understanding the meaning of annual revenue, how to calculate annual revenue, and then to be able to confidently share that number when required, can be key when growing a financially healthy business.

What is Annual Revenue? 

Annual business revenue refers to how much money your business makes in a year. Another way to describe it is “yearly business income.” This can include money you earn from the sale of your products and services, as well as investments or other sources of income. 

Why Do You Need to Track Annual Revenue? 

Employees who work for a business how much they make hourly or as salary. They use that information to create a personal budget, decide how much to set aside for savings, and to help qualify for loans such as a car loan or mortgage. 

Business owners have similar needs, but many businesses find their revenue fluctuates a lot on a month to month basis or even on an annual basis. Tracking annual revenue can help your business in several ways: 

  1. Understand business performance. Is your business making money? Is it making more or less than last year (or last month)? Tracking your total income helps you see how sales are going and compare that to past time periods. You can also use this information to see how your business compares to others in your industry. 
  2. Pay taxes. If you are self-employed, you likely must pay quarterly estimated taxes to the IRS based in part on your business income. While annual revenue isn’t the only number you need to accurately calculate income tax installment payments, it is part of the equation. Taxpayers who fail to make adequate estimated tax payments can face underpayment penalties. 
  3. Make plans. Understanding how much money your business is bringing in can help in your financial planning. It can inform decisions about how to spend your money (cut business expenses or hire a new employee, for example) and invest money (open a new location, for example). 
  4. Get financing. Many lenders will take revenue into account when reviewing small business loan applications and this number could be key to securing financing. 

Can It Help You Get Financing?

Yes, your annual business revenue can help you get financing. There are three main factors that most lenders look at when evaluating loan applications:

  1. Credit: This can include business credit and/or personal credit reports or credit scores. 
  2. Time in business: Lenders often prefer to lend to businesses with at least 1—2 years in business.
  3. Revenue: Many lenders have minimum annual revenue or average monthly revenue requirements. 

It’s the last factor that we are focused on here. Lenders often require business bank account statements (or will want to link to your business checking account) to verify revenues. 

Types of Revenue: Operating and Non-operating Revenue

There are two overarching types of revenue a business can earn: operating revenue and non-operating revenue.

Operating revenue is the one that most small business owners are familiar with, as it represents the money the business earns from its main operations. For example, the operating revenue from an e-commerce business that sells clothing online would come from the sales of that clothing. For a contractor, the money earned from those services would be its operating revenue. The typical small business would not succeed for long without operating revenue. 

Non-operating revenue is used to describe revenue earned outside its main business operations. For example, suppose that e-commerce business is flush with sales and puts some of that money into an interest-bearing bank account or invests some of that money. Revenue earned from those investments or interest would be non-operating revenue. 

Or let’s say the contractor ends up with some property it later sells. If that’s not how that contractor normally makes money, then that would be nonoperating revenue. 

The key difference here is which type of revenue is key to the businesses’ normal operations and growth. Non-operating income boosts the bottom line, but it’s not essential to how the business makes money. 

Annual Revenue vs Profit

Just because your business is bringing in money, that doesn’t mean it is making money. In order to truly understand your business financial health, you also need to understand whether your business is making a profit

Profit is how much your business makes after subtracting business expenses (including taxes). You may have heard the expression “operating in the red,” and that refers to a business that is losing money after expenses are paid. A business that’s operating “in the black” describes one that is at least breaking even, or making a profit. 

Some businesses can operate at a loss for years due to investment capital or expenses like tax write-offs, but most small businesses aim to be profitable. 

Formula for Calculating Annual Business Revenue

The formula for calculating annual business revenue is straightforward:

“Total Sales” refers to the total income the business generates by selling core products or services during the course of a year. (You may also see the term “fiscal year” here, which refers to the 12 months the business uses to track its finances. It may or may not be a calendar year.) 

“Other Operating Income” or non-operating income, refers to the other sources of income we mentioned earlier such as interest, investment or rental income not core to the businesses’ money-making activities. 

Another related metric some businesses follow carefully is monthly recurring revenue (MRR). This is particularly important for membership or subscription businesses, such as SaaS companies, where a drop in revenue may indicate a high churn rate; i.e. a high number of people canceling. 

Remember, revenue doesn’t necessarily equal profits since it doesn’t take into account the expenses or taxes the business pays. More on that in a moment.

Factors That Can Impact Annual Business Revenue Calculations

While this formula seems very straightforward, there are some gotcha factors that can impact annualized revenue calculations.

The first, and most common, is relying on out of date or incomplete information. This can happen for a couple of very common reasons:

1. You don’t use a central business bank account.

If you rely on multiple sources of revenue and they go into different accounts, it will be harder to keep track of how much total revenue your business is making. 

As an example, let’s say you run an online business selling custom jewelry and sales proceeds are deposited into a merchant account. Sometimes you transfer the funds from that account to your business bank account, but other times you use a debit card to withdraw funds. 

You also sell at local crafts fairs where you may get paid by cash or Venmo. Perhaps sometimes you just pocket the cash and other times you deposit it to your personal or business bank account.

And then maybe you take a few custom orders from clients who pay you with CashApp for Business or Venmo. Again, that money should wind up in the business bank account, but perhaps sometimes it doesn’t. 

You can see how it would be hard to calculate an accurate number for your year-to-date  revenue this way. Even a business that is careful to run everything through business bank accounts may have trouble producing this information if the business has multiple bank accounts or payment accounts such as PayPal or Venmo, for example. 

2. Your bookkeeping only gets updated at tax time.

This is the second common problem that can lead to inaccurate revenue calculations. If you’re not using accounting software to keep your books up to date (or hiring someone to do it for you) then you may have a rough idea of where your finances stand, but not a clear detailed picture. 

Using bookkeeping software and either learning it yourself or hiring someone to keep it up to date is a key way to make sure you have the financial data you need to stay on top of your business finances. 

Beyond that, here are some additional factors that can affect annual revenue calculations. Keep in mind that if your business has annual recurring revenue, changes in these factors can also easily impact ARR. 

Pricing changes. If you raise or lower your prices, revenue will change. This can affect your comparisons to previous years (or time frames) as you may sell more or less than you did in the past. Even if you sell exactly as much as you did in a previous time frame, the fact that you changed your prices will impact your forecasted annualized income.

Supplier changes. If the cost of materials or supplies change, you may need to adjust pricing which will affect revenue. And if you can’t get supplies at all due to supply chain disruptions, your revenue will definitely decrease. 

Competition. If a new competitor enters your market or if your competitors put similar products on sale, your revenues may be impacted, perhaps significantly. 

Seasonal fluctuations. Businesses that make most of their money during a specific time of year may struggle when asked about revenues because recent sales may not reflect the overall sales expected over the entire year. And if a busy season is disrupted for whatever reason, your annual projections may be way off. 

Economic conditions. Whether it is rising interest rates, lower unemployment that makes it harder to attract workers, or fears of a recession that cause your customers to pull back, you can’t ignore the impact of the economy on your anticipated sales. 

Financing Benefits for Accurately Calculating your Annual Business Revenue

Lenders are very cautious about avoiding risky loans. If a lender is asking about annual revenues but your recent bank statements show very different figures than the one you supplied on the application, it may be rejected. 

Lenders will often request copies of your business bank statements—or require you to link to your bank account so they can review that information—when you apply for financing. If your statements don’t match the figure on your application, you may not get the financing you need. 

To help ensure you have the best shot possible at getting financing, then, it’s important to take the following steps:

Use business accounts only for business revenues and expenses. Don’t mix personal and business accounts. When possible, use a central business bank account to clearly track your business income and a business credit card to pay for expenses. You can always have income from other sources, like PayPal, deposited into your business checking account before you spend it.

It’s especially crucial to use a business bank account if you form a business entity such as an LLC or a corporation. 

Keep your business accounting up to date. If your books are up to date you’ll be able to produce financial statements and see your business revenue at a glance. This is especially important if you use multiple business accounts. 

If you are starting a new business, you may wonder how annual revenue can help you get financing. Few lenders are willing to lend based on expected future revenue, and so startups do have fewer financing options. 

Business credit cards may be worth considering as most allow applicants to qualify based on total income from all sources, not just income from the business. 

This article was originally written on April 6, 2024.

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