Net Revenue: Profit Gain After Damaged and Returned Goods
In financial accounting there are a lot of terms that get used interchangeably by layman when they are in fact quite different. Likewise, there are terms that are used by companies that sound different and mean the same thing. Net revenue is one of the latter. It also called net sales and sales revenue. The bottom line is that net sales, sales revenue and net revenue all capture the amount of money being made through sales less the costs of damaged goods, discounts and returns. In the course financial accounting, you’ll learn all about these terms and what they mean for your business.
When you run a business, the majority – if not all – of your profits are coming in through the sale of goods or services. If you run a coffee shop, your sales would include coffee drinks, whole beans for sale, possibly t-shirts or other merchandise. The total amount of these sales for a designated period of time would be your gross revenue. That is to say, all profit without considering any of the associated costs of making that money. The net revenue figure exists to give you a more accurate picture of the money you’ve made after making necessary deductions. However, this still isn’t the perfect representation of your profits, the gross profit paints an even more accurate picture and the net profit gives the most accurate results. More about basic business finance in this online course.
Use Net Revenue
To understand how net revenue works, we have to do some basic math. How easy this process is really depends on how organized your bookkeeping is. The goal of calculating net revenue is to accurately find the sum of all damaged goods, goods that were damaged in the store; product returns, items that were returned to the store for a refund or store card during your refund policy window; and discounts, sale items, coupons applied and in-store credits for appealing to complaints and dissatisfied customers. In your financial records these deductions should be properly recorded so that when it’s time to find your net revenue and net profit – you aren’t digging around for old receipts, notes, and other non-organized records of these instances.
Once you have totaled these numbers together calculating your net revenue can begin.
Net revenue = gross revenue – damages/coupons/returns
Let’s say at your coffee shop your records report a gross revenue of $10,000 for the first quarter. After counting coupons that you ran in the local paper and accounting for the few returns of merchandise, you see that the total cost of “lost” money is $1,000. You want to know what your total net revenue is so you plug in the numbers according the formula above.
Net revenue =
$10,000 (gross revenue) – $1,000 (damages, coupons) = $9,000 (net revenue)
Now, as I mentioned above, the net revenue is a great figure for gaining a more accurate picture of your total profits – but it’s not the last step. Next, you want to use the net revenue to calculate your gross profit. The formula for this is:
Net revenue – cost of goods and services = gross profit
Cost of goods and services (COGS) is the amount of money you spend on obtaining the goods you have for sale. As a coffee shop, this would include the beans, the cups, syrups, milk, juice, fruit and so on. This would also include any marketing efforts put forth to increase coffee sales. Again, depending on the state of your records, this should be relatively easy to calculate. The course introduction to bookkeeping may help you get organized if you’re not already. Add up the total cost of goods and services. For the coffee shop, we’ll say the business spent $5,000 on COGS. Let’s plug in the numbers again and find our gross profit from our net revenue.
Gross profit =
$9,000 (net revenue) – $5,000 (cost of goods and services) = $4,000 (gross profit)
This means you made $4,000 profit by selling your goods. It’s important to note that the gross profit figure does not include deductions for operating expenses. In the article, types of efficiency ratios, you can read up how to calculate important ratios that are indicators of how your business is doing. Learn more about financial accounting for your business in this course.
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