Revenue: Definition, Calculation & Example

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When you’re evaluating a business, it’s important to understand key numbers. One of the most important is revenue, which can tell you how a company is doing year over year and if it’s bringing in more money than it’s spending.

While some people use revenue and income interchangeably, they are not the same thing. In a company’s income statement, revenue is the top line number while income (usually referred to as net income) is the bottom line number.

The difference between the two can tell you a lot about a company’s operations and profitability.

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What is revenue?

Revenue, sometimes referred to as sales, is all the money that a company generates during normal business operations.

Revenue Definition

Revenue is the gross income a company receives through all of its business activities. It is reported on the top line of a company’s income statement and is sometimes referred to as the “top line” or “top line revenue.”

Revenue is used to calculate the company’s net income, which takes into account operating expenses such as cost of goods, equipment, and salaries. In some cases, the word “sales” is used to refer to a company’s revenue on an income statement.

In this context, sales can be used to calculate price-to-sales ratio, which is a valuation comparing a company’s stock price to revenue. This can help investors understand the stock’s current market price per dollar of sales.

There are different ways to account for revenue depending on when the company made the sale versus when it received the cash.

With accrual accounting, the company counts the money when a transaction occurs. At the time of the transaction, the payment may or may not have taken place, but the sale is counted. This method accounts for purchases made on credit or that generate revenue streams for a company over a long period of time.

However, if you’re investing in a company that uses accrual accounting, it’s important to check the cash flow statements. This will tell you how well the company does at collecting the money from each transaction.

The other way for a company to classify revenue is through cash accounting. With cash accounting, the money is only counted when the payment is made. The sale is only counted when the cash hits the company’s bank account.

Types of revenue

Revenue is a blanket term that can be separated based on how the money is generated and what is counted toward that number. Most businesses have two main types of revenue: operating revenue and non-operating revenue.

Operating Revenue vs Non-Operating Revenue

Most companies generate both operating and non-operating revenue. Operating revenue is the money earned through normal company operations and sales. For example, if a company sells widgets, all the money generated from the sale of widgets is considered operating revenue.

Money earned through other sources, such as the sale of assets and equipment, lawsuits, etc. is considered non-operating revenue. Since this revenue is unpredictable, it needs to be separated from more predictable earnings such as that from regular business operations.

Beyond the two main types of revenue above, there are several ways to classify the money a company generates. Here are some common revenue terms you may encounter:

  • Deferred revenue: When a company receives payment before delivering a good or service, this is deferred revenue and is a liability on a company’s balance sheet.

  • Marginal revenue: This is the money generated when a company sells one more product or service. If a company sells 1,000 widgets, the additional revenue generated by the sale of the 1,001st widget would be considered marginal revenue. This accounts for how much the company would have to lower the price to sell one additional widget.

  • Gross revenue: This is the money generated from all sales and doesn’t account for the cost of the product or service. If a company sells 100 shirts for $10 each, the gross revenue would be $1,000.

  • Net revenue: This takes into account how much the product or service cost. In the example above, if each shirt cost the company $5, the net revenue would be $500.

Revenue vs income

Revenue is the total amount of money a company generates through the sale of its goods and services. This number does not take into account the cost of the goods or services, salaries, rent, and other expenses.

When looking at a company’s income statement, revenue is also known as the “top line” since it’s listed at the top. This is also sometimes known as gross sales or gross revenue. If you see reports of a company that is going through top-line growth, this means it’s generating more revenue through sales.

Net income, also referred to as income, is the profit a company makes after taking out the costs of goods and services, depreciation, taxes, salaries, rent, and so on. Most often when someone refers to a company’s income, they’re really talking about net income.

When looking at an income statement, the net income is often listed on the bottom after all the expenses are taken out. This is why you will often hear it referred to as a company’s “bottom line.”

It’s important to understand both a company’s revenue and income numbers. When a company has top-line growth, it is doing great at generating sales and increasing the money coming in. However, it does not take into account operating inefficiencies, which could be costing the company in profits.

Looking at a company’s revenue and net income year-over-year can tell you how well they are at scaling the business and becoming more efficient. Some companies can report a profit even if they don’t increase revenue because they trim some fat and reduce expenses.

This can be indicative of stagnant growth and potential leadership problems. Even if the net income shows a profit, the lack of increase (or even decrease) in gross revenue can be a red flag for investors.

How to calculate revenue

Revenue is an important measure of how a company is doing. Many companies will refer to revenue as sales in a quarterly statement.

Depending on a company’s business model, it may report revenue from products and services as two separate line items. The total revenue would be the combination of all types of revenue listed on a company’s balance sheet.

In the simplest of terms, revenue is the number of units a company sells multiplied by the average price per unit. For service companies, the calculation takes into account the number of customers serviced multiplied by the average price of services.

Here’s an example of how to calculate revenue:

Units Sold x Average Price per Unit = Revenue

Customer Serviced x Average Price of Services = Revenue

For companies such as Amazon that sell both products and services, the total revenue would include both of the calculations above.

Most times, the revenue reported on an income statement excludes discounts and refunds. This means that if a company sells 10 widgets for $100 each and offers a 5 percent discount for paying cash, the gross revenue reported would be $950 (10 x $100 = $1,000; $1,000 x 0.95 = $950).

If a customer comes back and returns one of the widgets, the gross revenue reported would be $855 (9 x $100 = $900; $900 x 0.95 = $855).

Total revenue will include income from both company sales and business operations. If a company receives income from selling a property, it is often listed under other revenue.

Some companies try to include as much revenue as possible under the top line, keeping the “other revenue” line as low as possible. That’s because reports and analysts focus on the top line when determining how a business is doing.

Examples of revenue

What makes up revenue depends on the type of business. For companies that sell goods, revenue is calculated based on the number of units sold and the average price per unit. Service-based businesses calculate revenue using the number of customers and the services sold to each customer.

The calculation for non-profit organization is a little different. Revenue in this case can include grants from government entities, money from fundraising activities, donations from foundations or individuals, membership fees, investments and so on.

If the non-profit is a government entity such as a county hospital, revenue can come from property taxes, Medicare and Medicaid payments, insurance payouts, and much more. This is why it’s important to understand the business model for the entity when looking at the revenue numbers.

Government entities can also generate revenue through fees and fines, the sale of securities, bonds, rights to land or other resources.

Looking at federal revenue, the three main sources of tax revenue for the U.S. government include corporate income taxes, individual income taxes and payroll taxes.

Other sources of revenue include excise taxes, which are taxes on goods and services such as alcohol, gasoline and tobacco. In addition, the revenue number includes gift and estate taxes, fees, charges, customs duties and more.

Last Updated May 14, 2020

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