Revenue is the top line or the number that indicates how much overall income the business made in a given time period. This does not include any deductions, expenses, or costs. Calculating revenue is relatively easy, if you know the price of your goods and how many were sold. Keeping good records of all transactions is the key to tip-top financial management. Learn more about financial management basics in this course.
In the most basic sense, the revenue formula is:
Quantity x price = revenue
Of course, there are other income variables like rental income and investments that also contribute to the total revenue of a company. But let’s focus on the basic principal of revenue, which is how many items did you sell and how much did they cost?
Keeping good track of your finances in a business is top priority. In the course Business by the Numbers learn the most efficient ways to track and monitor company money.
Let’s say you run a bakery and you want to calculate your total revenue for the quarter. The first step is to understand how many products you sold and what products they were. You can find this out by looking at your cash register transactions, or your books if you are good at keeping track. For the same of this example, you notice you’ve sold:
- 1,000 loafs of bread (750 baguettes and 250 cinnamon raisin)
- 500 muffins
- 2,000 bagels
- 500 cupcakes
- The muffins are always 1.25 each.
- The bagels are $2.00 each.
- The cupcakes are always $1.50 each.
- Cinnamon raisin bread is $6.00 per loaf.
- French baguettes are $5.00 per loaf.
So now we need to calculate how many of each unique item you sold and multiply it by its respective cost.
- 750 baguettes x $5.00 = $3,750
- 250 cinnamon raisin loafs x $6.00 = $1,500
- 500 muffins x $1.25 = $625
- 2,000 bagels x $2.00 = $4,000
- 500 cupcakes x $1.50 = $750
Alright, so we know the total amount of goods sold and the total amount of revenue made off of each item. The last step is to add the totals together to get the total revenue.
$3,750 + $1,500 + $625 + $4,000 + $750 = $10,625 (total revenue)
Revenue is an important figure to obtain, not so much because it’s inherently symbolic of your profits, but more because it’s used to calculate so many other more telling figures. For example, we now know that the bakery made $10,625 in total revenue for this quarter. But now we want to know how much money the bakery owner is going to make in profit, after all expenses are included. Without using the revenue formula, we would never know what number to begin deducting expenses from to get the profit total. Some companies choose different methods of recognizing their revenue. Many will record income in the books as the job is being done or service being sold – regardless of actual payment. Some, will wait until they have money in hand. Read about the different types of revenue recognition and how this affects your revenue outcome for a period.
The bakery owner spends $6,000 on supplies, every quarter, to produce his goods. This expense is called the cost of goods and services and includes any materials purchased to create the product being sold. It also includes marketing efforts to sell the item. The baker needs dough, yeast, salt, sugar, milk, raisins and so on. Sometimes, the baker forgets that he has breads in the oven and he is forced to throw them out because their burnt. Also, the baker runs sales for half off breads at the end of every day. The damaged goods and discounts are deducted from the total revenue to equal the net sales. The baker’s deductions total $1,500 this quarter.
The cost of goods is then deducted from the net sales to figure out the gross profit. Gross profit is the total sales profit without including overhead costs or, operating expenses, like rent, utilities, payroll and taxes. His operating expenses are $2,000 a month. The net income is calculated by deducting the cost of goods and services and the operational costs from the revenue. The course financial accounting can help you understand these financial terms better and give you guidance to managing your own finances.
Bakery financial report:
- Revenue: $10,625
- COGS: $6,000
- Net Sales: $9,125 [ $10,625 (revenue) – $1,500 (damages and discounts) ]
- Gross Profit: $3,125 [$9,125 (net sales) – $6,000 (COGS) ]
- Operating expenses: $2,000
- Net income: $2,625 [ $10,625 (revenue) – $6,000 (COGS) – $2,000 (operating expenses) ]
See how it goes ‘round circle? Revenue is the top line and net income is the bottom line. We can gather all of this data by starting with the revenue formula. Learn how to better interpret your financial statements in this online course.