A business exists to make money, right? That’s probably why you decided to own one. You get to call the shots, sell what you want and (sometimes) create your own schedule. The only downside for most is dealing with all of the accounting that comes along with making money. Don’t let the terms confuse you, there are a lot of names for the same thing that get tossed around and can make you feel a bit crazy. Gross revenue is important because it allows you to see how much money is coming into your business as a total. However, this figure is not indicative of the amount of money that you are going to be bringing home. Learn more about accounting and how it’s important for business in this course.
When you run a business, the bulk of your money – if not all of your money – is going to come via sales of your goods and services. Let’s say you run a shoe store. You sell 100 pairs of shoes at the cost of $40 a pair. Your gross revenue or raw sales income would be 100 x $40 which equals $4,000.
100 pairs x $40 each = $4,000 gross revenue
Now, $4,000 sounds like a good amount of money but it’s not what you think. There are deductions that need to be made from your gross revenue to account for the cost of goods and services (COGS) and the cost of damaged goods, returned goods and discounts applied. Generally speaking, the gross revenue number isn’t really of much importance, other than you use it to calculate the net sales from and thus the gross profit. In the eyes of investors, they don’t care how much money you’re bringing in overall – they want to know how much is left after all deductions are accounted for. This is an indicator as to whether the business is managing its money properly and if the financial trends are moving up, or down. Learn basic business finance in this course.
Using Gross Revenue
Calculating gross revenue is simple, you total up the amount of incoming sales during a designated period of time and boom – you have the gross revenue. What gets a bit tricky (especially if bookkeeping is unkempt) is using the gross revenue to get your gross profit. Learn more about bookkeeping in this introductory course. The gross profit is an important number as it conveys what profit from sales the company is gaining (or not gaining). The gross profit number Learn more about bookkeeping in this one of the figures investors will consider when evaluating your business.
Using the example above, we see that the shoe store has a gross revenue of $4,000. What we want to find out is how much money did the company spend to make that money? And, how much did they lose in damaged goods, returned goods or discounted goods? This is where cost of goods and services (COGS) and net sales comes into play. COGS is the amount of money the company spends to produce their goods and services, including marketing, shipping, materials and purchasing inventory. The net sales is the amount of money left after the cost of damaged goods, returns and discounts is deducted from the gross revenue. Knowing accounting is vital to business success. Read about why accounting is so important.
- Shoe Co. has $4,000 in gross revenue for the first quarter
- They’ve calculated $1,000 in damages, returns and discounts
- They spent $1000 on the cost of goods and services
Goal: to find the gross profit using the gross revenue
Gross revenue ($4,000) – damages/returns/discounts ($1,000) = net sales ($3,000)
Net sales ($3,000) – cost of goods and services ($1,000) = gross profit ($2,000)
This means that after all the costs of obtaining the goods for sale, and all of the deductions from discounts, damages and returns are made, the shoe company has a gross profit of $2,000. The gross profit does not include any deductions from operating expenses. That’s a whole other equation for another time.
So while the gross revenue may not seem important to investors, it’s a number that you need to get familiar with as you can calculate the important numbers from it. It’s also good to differentiate between what is actual profit and what just appears to be profit to ensure the success and longevity of your business. Does financial talk make you want to run for the hills? Try this course called Chalk Talk: Financial Accounting. They make it easy to learn the basics.